Question

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		%		%

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