The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $35 million and having a four-year expected life, after which the assets can be salvaged for $7 million. In addition, the division has $35 million in assets that are not depreciable. After four years, the division will have $35 million available from these nondepreciable assets. This means that the division has invested $70 million in assets with a salvage value of $42 million. Annual depreciation is $7 million. Annual operating cash flows are $27.5 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 Replacement Cost Annual Cash Flow 1 $ 70,000,000 × 1.1 = $ 77,000,000 $ 27,500,000 × 1.1 = $ 30,250,000 2 $ 77,000,000 × 1.1 = $ 84,700,000 $ 30,250,000 × 1.1 = $ 33,275,000 3 Etc. Etc. 4 Depreciation is as follows. Year For the Year "Accumulated" 1 $ 7,700,000 $ 7,700,000 (= 10% × $77,000,000) 2 8,470,000 16,940,000 (= 20% × 84,700,000) 3 9,317,000 27,951,000 4 10,248,700 40,994,800 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. Historical Cost ROI Net Book Value Gross Book Value Year 1 % % Year 2 % % Year 3 % % Year 4 % % Current Cost ROI Net Book Value Gross Book Value Year 1 % % Year 2 % % Year 3 % % Year 4 % %

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $35 million and having a four-year expected life, after which the assets can be salvaged for $7 million. In addition, the division has $35 million in assets that are not depreciable. After four years, the division will have $35 million available from these nondepreciable assets. This means that the division has invested $70 million in assets with a salvage value of $42 million. Annual depreciation is $7 million. Annual operating cash flows are $27.5 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 Replacement Cost Annual Cash Flow 1 $ 70,000,000 × 1.1 = $ 77,000,000 $ 27,500,000 × 1.1 = $ 30,250,000 2 $ 77,000,000 × 1.1 = $ 84,700,000 $ 30,250,000 × 1.1 = $ 33,275,000 3 Etc. Etc. 4 Depreciation is as follows. Year For the Year "Accumulated" 1 $ 7,700,000 $ 7,700,000 (= 10% × $77,000,000) 2 8,470,000 16,940,000 (= 20% × 84,700,000) 3 9,317,000 27,951,000 4 10,248,700 40,994,800 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. Historical Cost ROI Net Book Value Gross Book Value Year 1 % % Year 2 % % Year 3 % % Year 4 % % Current Cost ROI Net Book Value Gross Book Value Year 1 % % Year 2 % % Year 3 % % Year 4 % %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 22P: The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,...

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End of Year	Replacement Cost		Annual Cash Flow
1	$	70,000,000	× 1.1 =	$	77,000,000	$	27,500,000	× 1.1 =	$	30,250,000
2	$	77,000,000	× 1.1 =	$	84,700,000	$	30,250,000	× 1.1 =	$	33,275,000
3	Etc.		Etc.
4

Depreciation is as follows.

Year	For the Year	"Accumulated"
1	$	7,700,000	$	7,700,000	(= 10% × $77,000,000)
2		8,470,000		16,940,000	(= 20% × 84,700,000)
3		9,317,000		27,951,000
4		10,248,700		40,994,800

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.

Historical Cost	ROI
Net Book Value	Gross Book Value
Year 1		%	%
Year 2		%	%
Year 3		%	%
Year 4		%	%

Current Cost	ROI
Net Book Value	Gross Book Value
Year 1		%	%
Year 2		%	%
Year 3		%	%
Year 4		%	%

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