Question

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing...

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $40 million and having a four-year expected life, after which the assets can be salvaged for $8 million. In addition, the division has $40 million in assets that are not depreciable. After four years, the division will have $40 million available from these nondepreciable assets. This means that the division has invested $80 million in assets with a salvage value of $48 million. Annual depreciation is $8 million. Annual operating cash flows are $21 million. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI.

Required:

a. & b. Compute ROI, using net book value and gross book value. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

NET BOOK VALUE GROSS BOOK VALUE
YEAR 1 % %
YEAR 2 % %
YEAR 3 % %
YEAR 4 % %

Homework Answers

Answer #1
Calculation of ROI
Year Net book Value Gross book Value
Year 1 18.06 16.25
Year 2 20.31 16.25
Year 3 23.21 16.25
Year 4 27.08 16.25
ROI base on gross book value = Net Income/Gross book Value
ROI base on net book value = Net Income/Net book Value
Working Notes
Amount in $ (million)
Annual cash Inflow 21
Less: Annual Depreciation 8
Net Income 13
Calculation of Net book Value of investment (Amount in $ million)
Year 1 Year 2 Year 3 Year 4
Gross book Value of Investment 80 80 80 80
Less: Accmulated depreciation 8 16 24 32
Net book value of Investment 72 64 56 48
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