In: Finance
Vegan Steaks had the best year ever, with sales of $4,500,000 and operating profit of $950,000. The balance sheet at the beginning of the year showed assets used in production with a cost of $20,000,000 and accumulated depreciation of $5,000,000. The company didn’t buy any assets during the year but did have depreciation expense of $1,000,000. Calculate the ROI for the year.
Solution:
The formula for calculating the Return on Investment ( ROI ) is
= Operating Profit / Average assets
Where
Average assets = ( Opening balance of assets + Closing balance of assets ) / 2
As per the information given in the question we have
Operating profit = $ 950,000
Cost of assets = $ 20,000,000 ; Accumulated Depreciation at the beginning of the year = $ 5,000,000
Depreciation expense incurred during the year = $ 1,000,000
We know that
Opening balance of assets = Cost of assets – Accumulated Depreciation at the beginning of the year
Applying the available information in the above formula we have
Opening balance of assets = $ 20,000,000 - $ 5,000,000 = $ 15,000,000
We know that
Closing balance of assets = Cost of assets – Accumulated Depreciation at the beginning of the year - Depreciation expense incurred during the year
Applying the available information in the above formula we have
Closing balance of assets = $ 20,000,000 - $ 5,000,000 - $ 1,000,000 = $ 14,000,000
We know that
Average assets = ( Opening balance of assets + Closing balance of assets ) / 2
As per the information available we have
Opening balance of assets = $ 15,000,000 ; Closing balance of assets = $ 14,000,000
Applying the available information in the formula for average assets we have
= ( $ 15,000,000 + $ 14,000,000 ) / 2
= $ 29,000,000 / 2
= $ 14,500,000
Thus the average assets = $ 14,500,000
Calculation of Return on Investment:
The formula for calculating the Return on Investment ( ROI ) is
= Operating Profit / Average assets
As per the information available we have
Operating profit = $ 950,000
Average assets = $ 14,500,000
Applying the available information in the formula we have
= $ 950,000 / $ 14,500,000
= 0.065517
= 6.5517 %
= 6.55 %
Thus the Return on Investment (ROI) for the year = 6.55 %