Return on Investment; Present Value Depreciation; Spreadsheet Application As indicatedin the chapter, there are goal congruence problems associated with the use of ROI as an indicator ofbusiness unit financial performance. One such problem relates to the bias against accepting new investments because of the adverse effect on a business unit’s ROI metric. Assume, for example, that themanager of a business unit can invest in a new, depreciable asset costing $75,000 and that this asset hasa 3-year life with no salvage value. Cash inflows associated with this investment are projected to beas follows: $30,000, $35,000, and $43,200. (Ignore taxes.) This scenario leads to an estimated internalrate of return (IRR) of 19.44%. Assume that the minimum required rate of return is 15%.Required1. Demonstrate, using the IRR function in Excel, that the IRR on this proposed investment is indeed19.44%.2. Calculate the year-by-year return on investment (ROI) on this proposed investment. For this problem,use the beginning-of-year book value of the asset as the denominator of your calculation each year.
in the chapter, there are goal congruence problems associated with the use of ROI as an indicator of
business unit financial performance. One such problem relates to the bias against accepting new investments because of the adverse effect on a business unit’s ROI metric. Assume, for example, that the
manager of a business unit can invest in a new, depreciable asset costing $75,000 and that this asset has
a 3-year life with no salvage value.
as follows: $30,000, $35,000, and $43,200. (Ignore taxes.) This scenario leads to an estimated
rate of return
Required
1. Demonstrate, using the IRR function in Excel, that the IRR on this proposed investment is indeed
19.44%.
2. Calculate the year-by-year return on investment (ROI) on this proposed investment. For this problem,
use the beginning-of-year book value of the asset as the denominator of your calculation each year.
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