QuestionJuly 20, 2025

Adams, Inc, has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values. True False

Adams, Inc, has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book values. True False
Adams, Inc, has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets' net book
values.
True
False

Solution
3.4(276 votes)

Answer

True Explanation 1. Understand ROI Calculation ROI (Return on Investment) is calculated as \text{ROI} = \frac{\text{Net Income}}{\text{Investment}}. Using net book values for assets means considering the depreciated value rather than the original cost. 2. Analyze Impact of Net Book Values Using net book values typically results in a lower investment base, potentially increasing ROI. This can incentivize managers to replace old equipment since new equipment may have higher efficiency and profitability. 3. Determine Correctness If Adams wants to encourage replacing old equipment, using net book values can be effective because it highlights the inefficiency of older assets compared to newer ones.

Explanation

1. Understand ROI Calculation<br /> ROI (Return on Investment) is calculated as $\text{ROI} = \frac{\text{Net Income}}{\text{Investment}}$. Using net book values for assets means considering the depreciated value rather than the original cost.<br /><br />2. Analyze Impact of Net Book Values<br /> Using net book values typically results in a lower investment base, potentially increasing ROI. This can incentivize managers to replace old equipment since new equipment may have higher efficiency and profitability.<br /><br />3. Determine Correctness<br /> If Adams wants to encourage replacing old equipment, using net book values can be effective because it highlights the inefficiency of older assets compared to newer ones.
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