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 $25 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 all cash flows increase 10 percent at the end of each year. This has the following effect on the assets' replacement cost and annual cash flows. End of Year 1 2 Replacement Cost $80,000,000 × 1.1- $88,000,000 $88,000,000 x 1.1 = $96,800,000 Ete. Depreciation is as follows. Year 1 2 3 For the Year $ 8,800,000 9,680,000 10,648,000 11,712,800 Annual Cash Flow $25,000,000 × 1.1 $27,500,000 $27,500,000 x 1.1 = $30,250,000 Etc. "Accumulated" $ 8,800,000 (-10% × $88,000,000) 19,360,000 (-20% × 96,800,000) 31,944,000 46,851,200 Note that "accumulated" depreciation is 10 percent of the gross book value of depreciable assets after one year, 20 percent after two years, and so forth. Required: a. & b. Compute ROI using historical cost, net book value and gross book value. c. & d. Compute ROI using current cost, net book value and gross book value.
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 $25 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 all cash flows increase 10 percent at the end of each year. This has the following effect on the assets' replacement cost and annual cash flows. End of Year 1 2 Replacement Cost $80,000,000 × 1.1- $88,000,000 $88,000,000 x 1.1 = $96,800,000 Ete. Depreciation is as follows. Year 1 2 3 For the Year $ 8,800,000 9,680,000 10,648,000 11,712,800 Annual Cash Flow $25,000,000 × 1.1 $27,500,000 $27,500,000 x 1.1 = $30,250,000 Etc. "Accumulated" $ 8,800,000 (-10% × $88,000,000) 19,360,000 (-20% × 96,800,000) 31,944,000 46,851,200 Note that "accumulated" depreciation is 10 percent of the gross book value of depreciable assets after one year, 20 percent after two years, and so forth. Required: a. & b. Compute ROI using historical cost, net book value and gross book value. c. & d. Compute ROI using current cost, net book value and gross book value.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
D1.
Transcribed Image Text: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 $25 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 all cash flows increase 10 percent
at the end of each year. This has the following effect on the assets' replacement cost and annual cash flows.
End of Year
1
2
3
4
Depreciation is as follows.
For the Year
$ 8,800,000
9,680,000
10,648,000
11,712,800
Year
1
2
3
4
Replacement Cost
$80,000,000 × 1.1 - $88,000,000
$88,000,000 × 1.1 = $96,800,000
Etc.
Note that "accumulated" depreciation is 10 percent of the gross book value of depreciable assets after one year, 20 percent after two
years, and so forth.
"Accumulated"
$ 8,800,000 (-10% × $88,000,000)
19, 60,000 (208*96,800,000)
31,944,000
46,851,200
Required:
a. & b. Compute ROI using historical cost, net book value and gross book value.
c. & d. Compute ROI using current cost, net book value and gross book value.
Historical
Cost
Year 1
Year 2
Year 3
Year 4
Complete this question by entering your answers in the tabs below.
Req A and B Req C and D
Compute ROI using historical cost, net book value and gross book value. (Enter your answers as a percentage rounded to 1
decimal place (i.e., 32.1).)
Annual Cash Flow
$25,000,000 x 1.1 = $27,500,000
$27,500,000 x 1.1 = $30,250,000
Etc.
Net Book Value
30.9
%
39.5 %
51.1%
67.2 %
ROI
Gross Book
Value
Answer is not complete.
27.8 %
31.6%
35.8 %
40.3 x %
Req A and B
Req C and D >
Transcribed Image Text:Complete this question by entering your answers in the tabs below.
Req A and B Req C and D
Compute ROI using current cost, net book value and gross book value. (Enter your answers as a percentage rounded to 1
decimal place (i.e., 32.1).)
Current
Cost
Year 1
Year 2
Year 3
Year 4
Net Book Value
27.1 x %
39.5 x %
51.1%
67.2 x %
ROI
Gross Book Value
%
%
%
%
< Req A and B
Req C and D
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