Question

using net book values instead of gross book values to compute return on investment (roi) might encourage an investment center manager to delay replacing inefficient assets until they are fully depreciated.t/f

Answer 1

Using net book values instead of gross book values to compute return on investment might encourage an investment centre manager to delay replacing inefficient assets until they are fully depreciated. - True

The value of an asset as it appears on a firm's balance sheet, less any depreciation that has been applied to the asset, is known as net book value. The initial cost of an asset, before any depreciation has been taken into account, is its gross book value. Using net book value to calculate return on investment (ROI) can affect how an investment centre management acts.

For example, the manager may be enticed to wait to replace inefficient assets until they have fully depreciated if net book value is used to calculate ROI. This is because when an asset is fully depreciated, its net book value is zero, and any profits generated by the asset will be reflected in the ROI calculation as pure profit. As a result, the ROI will be higher if the asset is retained until it is fully depreciated, rather than being replaced with a newer, more efficient asset.

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