The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $65 million and having a four-year expected life, after which the assets can be salvaged for $13 million. In addition, the division has $65 million in assets that are not depreciable. After four years, the division will have $65 million available from these nondepreciable assets. This means that the division has invested $130 million in assets with a salvage value of $78 million. Annual depreciation is $13 million. Annual operating cash flows are $32 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 a 12 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.

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Chapter1: Financial Statements And Business Decisions
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The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $65
million and having a four-year expected life, after which the assets can be salvaged for $13 million. In addition, the division
has $65 million in assets that are not depreciable. After four years, the division will have $65 million available from these
nondepreciable assets. This means that the division has invested $130 million in assets with a salvage value of $78 million.
Annual depreciation is $13 million. Annual operating cash flows are $32 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 a 12 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.
(Enter your answers in thousands of dollars.)
Year 1
Year 2
Year 3
Year 4
Residual Income
Net Book Gross Book
Value
Value
Transcribed Image Text:The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $65 million and having a four-year expected life, after which the assets can be salvaged for $13 million. In addition, the division has $65 million in assets that are not depreciable. After four years, the division will have $65 million available from these nondepreciable assets. This means that the division has invested $130 million in assets with a salvage value of $78 million. Annual depreciation is $13 million. Annual operating cash flows are $32 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 a 12 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. (Enter your answers in thousands of dollars.) Year 1 Year 2 Year 3 Year 4 Residual Income Net Book Gross Book Value Value
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