US CMA Part 1 · Chapter 3 · Question 24 of 30
A division measures invested capital at net book value. If operating income and all other factors stay constant, what happens to the division's ROI as its assets age?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) ROI rises over time because the denominator falls as accumulated depreciation increases
Explanation
Using net book value, the investment base shrinks as assets are depreciated, so ROI increases even though performance has not improved. This can discourage managers from replacing old equipment, which is a known drawback of net book value as the investment base.
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