Question

A division is considering the acquisition of a new asset that will cost $2,890,000 and have a cash flow of $710,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes.

Required:

a. & b. What is the ROI for each year of the asset's life if the division uses beginning-of-year asset balances and net book value for the computation? What is the residual income each year if the cost of capital is 8 percent? (Enter "ROI" answers as a percentage rounded to 1 decimal place (i.e., 32.1). Negative amounts should be indicated by a minus sign.)

Year	Investment Base	ROI		Residual Income
1	2,890,000		%
2			%
3			%
4			%

Answer 1

Depreciation expense per year = 2890000/4 = 722500

a. & b. What is the ROI for each year of the asset's life if the division uses beginning-of-year asset balances and net book value for the computation? What is the residual income each year if the cost of capital is 8 percent? (Enter "ROI" answers as a percentage rounded to 1 decimal place (i.e., 32.1). Negative amounts should be indicated by a minus sign.)

	Year Investment Base ROI Residual Income 1 2,890,000 12500/2890000 = -0.4% % -218700 2 2167500 12500/2167500 = -0.6% % -247600 3 1445000 12500/1445000 = -0.9% % -103100 4 722500 12500/722500 = -1.7% % -45300