Final answer:
To calculate the return on assets, divide the net operating income by the average total assets. - For Gardenia Co., the net operating income is $3 million each year, and the average total assets remain constant at $20 million. - For Lantana Co., the net operating income is $5 million each year, and the average total assets increase by 10% each year due to asset replacements.
Step-by-step explanation:
Return on Assets (ROA) Calculation:
- Return on assets (ROA) is calculated by dividing the net operating income by the average total assets.
- For Gardenia Co.:
Net Operating Income = Pre-tax Net Operating Cash Flow - Annual Depreciation Expense
Average Total Assets = Initial Investment in Plant and Equipment - For Lantana Co.:
Net Operating Income = Pre-tax Net Operating Cash Flow - Annual Depreciation Expense + Depreciation Expense on Replacement Assets
Average Total Assets = Net Asset Base
Return on Assets Calculation for Gardenia Co. for 2017 through 2021:
- 2017:
Net Operating Income = $3 million
Average Total Assets = $20 million - 2018, 2019, 2020, 2021:
Net Operating Income increases by 2% each year
Average Total Assets remains constant at $20 million
Return on Assets Calculation for Lantana Co. for 2017 through 2021:
- 2017:
Net Operating Income = $5 million
Average Total Assets = $20 million - 2018, 2019, 2020, 2021:
Net Operating Income increases by 2% each year
Average Total Assets increase by 10% each year due to asset replacements