How does the choice of long-term asset valuation affect

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Reference no: EM13569226

P.F. Skidaddle's operates casual dining restaurants in three regions: Denver, Seattle and Sacramento. Each geographic market is considered a separate division. The Denver division is made up of four resturants, each built in early 2002. The Seattle division is made up of three resturants, each built in January 2006. The Sacramento division is the newest, consisting of three restaurants built four years ago. Division managers at P.F. Skidaddle's are evaluated on the basis of ROI. The following information refers to the three divisions at the end of 2012 :

	Denver	Seattle	Sacramento	Total
Division Rev	$8365000	$6025000	$5445000	$20138000
Division Exp	7945000	5521000	4979000	18445000
Division Op Inc	723000	504000	466000	1693000
Gross BV of long-term assets	4750000	3750000	4050000	12300000
Acc Dep	3300000	1750000	1080000	6130000
Current Assets	999800	768200	824600	2592600
Dep Exp	300000	250000	270000	820000
Construction cost index for year of construction	100	110	118

1. Calculate ROI for each division using net BV of total assets.

2. Using the technique in Exhibit 23-2, compute ROI using current-cost estimates for long-term assets and depreciation expense. Construction cost index for 2012 is 122. Estimated useful life of operational assets is 15 years.

3. How does the choice of long-term asset valuation affect management deecisions regarding new capital investments? Why might this be more significant to the Denver division manager than to the Sacramento division manager?

Reference no: EM13569226

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