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    Return on Investment

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    What method would be most appropriate for calculating the return on investment? Why? What would be the ROI for the current year?

    Fiscal Year, Jan. 1 to Dec. 31 (000 omitted)
    Total assets, Jan. 1 $400,000
    Total assets, Dec. 31 525,000
    Long-term debt, Jan. 1 75,000
    Long-term debt Dec.31 96,000
    Owner's equity, Jan. 1 278,000
    Owner's equity, Dec. 31 303,000
    Net income for the year 54,000
    Interest expense on long term debt 4,200

    Tax rate 30%

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    Solution Preview

    The most appropriate method for calculating the ROI is:
    ROI = (Net Income + Interest X(1-tax rate)/Average Total Assets

    We use this formula because we are measuring the return on investment and total assets represent the total investment. We take the average since the return is earned over a period of time and so the average gives a better picture as opposed to the year end value.
    We add the ...

    Solution Summary

    The solution explains how to calculate the return on investment