The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $37 million and having a 4-year expected life, after which the assets can be salvaged for $7.4 million. In addition, the division has $37 million in assets that are not depreciable. After four years, the division will have $37 million available from these nondepreciable assets. This means that the division has invested $74 million in assets with a salvage value of $44.4 million. Annual depreciation is $7.4 million. Annual operating cash flows are $17 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. ROI - Net book value (%) ROI - Gross book value (%) Year 1 Year 2 Year 3 Year 4
Solution:-
Year | Net book value | Gross book value | ||
ROI % | Calculation | ROI% | Calculation | |
Year 1 | 12.97% | 12.97% | ||
Year 2 | 14.41% | 12.97% | ||
Year 3 | 16.22% | 12.97% | ||
Year 4 | 18.53% | 12.97% |
Note:- Final answer is rounded off to 2 decimal places.
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