Problem 14-67 (Algo) Compare Historical, Net Book Value to Gross Book Value, Residual Income (LO 14- 3,5) The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $55 million and having a four-year expected life, after which the assets can be salvaged for $11.0 million. In addition, the division has $55 million in assets that are not depreciable. After four years, the division will have $55 million available from these nondepreciable assets. This means that the division has invested $110 million in assets with a salvage value of $66.0 million. Annual operating cash flows are $21 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the company uses an 11 percent cost of capital. Required: a. Compute residual Income, using net book value for each year. b. Compute residual Income, using gross book value for each year. Note: For all the requirements, enter your answers in thousands of dollars. Negative amounts should be indicated by a minus sign. Residual Income Net Book Gross Book Value Value Year 1 S (1,100) S (2,100) Year 2 S 110 $ (2,100) Year 3 S 1,320 S (2,100) Year 4 S 2,530 $ (2,100)
Problem 14-67 (Algo) Compare Historical, Net Book Value to Gross Book Value, Residual Income (LO 14- 3,5) The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $55 million and having a four-year expected life, after which the assets can be salvaged for $11.0 million. In addition, the division has $55 million in assets that are not depreciable. After four years, the division will have $55 million available from these nondepreciable assets. This means that the division has invested $110 million in assets with a salvage value of $66.0 million. Annual operating cash flows are $21 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the company uses an 11 percent cost of capital. Required: a. Compute residual Income, using net book value for each year. b. Compute residual Income, using gross book value for each year. Note: For all the requirements, enter your answers in thousands of dollars. Negative amounts should be indicated by a minus sign. Residual Income Net Book Gross Book Value Value Year 1 S (1,100) S (2,100) Year 2 S 110 $ (2,100) Year 3 S 1,320 S (2,100) Year 4 S 2,530 $ (2,100)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 14-67 (Algo) Compare Historical, Net Book Value to Gross Book Value, Residual Income (LO 14-
3,5)
The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $55 million and having a
four-year expected life, after which the assets can be salvaged for $11.0 million. In addition, the division has $55 million in assets that
are not depreciable. After four years, the division will have $55 million available from these nondepreciable assets. This means that the
division has invested $110 million in assets with a salvage value of $66.0 million. Annual operating cash flows are $21 million. In
computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis,
recognizing the salvage values noted. Ignore taxes.
Assume that the company uses an 11 percent cost of capital.
Required:
a. Compute residual Income, using net book value for each year.
b. Compute residual Income, using gross book value for each year.
Note: For all the requirements, enter your answers in thousands of dollars. Negative amounts should be Indicated by a minus
sign.
Residual Income
Net Book Gross Book
Value
Value
Year 1
S
(1,100) S (2,100)
Year 2
S
110 $
(2,100)
Year 3
S
1,320 S
(2,100)
Year 4
S
2,530
$
(2,100)
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