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St. Louis
$10,980,000
+
15
=
$732,000
Memphis
$ 8,318,182
+
15
=
$554,545
New Orleans
$ 8,374,576
+
15
=
$558,305
Step 5:
Historical-cost
operating
income
–
Current-cost
depreciation
expense in
2014 dollars
–
Historical-
cost
depreciation
expense
=
Operating income for
2014 using current-cost
depreciation expense in
2014 dollars
St. Louis
$1,446,000
–
($732,000
–
$600,000)
=
$1,314,000
Memphis
$1,008,000
–
($554,545
–
$500,000)
=
$953,454
New Orleans
$ 932,000
–
($558,305
–
$540,000)
=
$913,695
Step 6:
Operating income
for 2014 using
current-cost
depreciation expense
in 2014 dollars
÷
Current cost
of total assets
at end of 2013
=
ROI using
current-cost
estimate
St. Louis
$1,314,000
+
$4,927,600
=
26.67%
Memphis
$953,454
+
$5,972,764
=
15.96%
New Orleans
$913,695
+
$7,790,556
=
11.73%
3. Adjusting assets to recognize current costs negates differences in the investment base
caused solely by differences in construction-price levels. Compared with historical-cost ROI,
current cost ROI better measures the current economic returns from the investment. Because the
St. Louis assets are older, there is a more significant difference between historical cost and current
cost.
23-30 (30 min.) Multinational firms, differing risk, comparison of profit, ROI, and RI.
Zeiss Multinational, Inc., has divisions in the United States, Germany, and New Zealand. The U.S.
division is the oldest and most established of the three and has a cost of capital of 6.5%. The
German division was started 3 years ago when the exchange rate for the euro was 1 euro = $1.40.
The German division is a large and powerful division of Zeiss, Inc., with a cost of capital of 10%.
The New Zealand division was started this year, when the exchange rate was 1 New Zealand Dollar
(NZD) = $0.75. Its cost of capital is 13%. Average exchange rates for the current year are 1 euro
= $1.50 and 1 NZD = $0.60. Other information for the three divisions includes:
