The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $110 million and having a four-year expected life, after which the assets can be salvaged for $22 million. In addition, the division has $110 million in assets that are not depreciable. After four years, the division will have $110 million available from these nondepreciable assets. This means that the division has invested $220 million in assets with a salvage value of $132 million. Annual depreciation is $22 million. Annual operating cash flows are $59 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.

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $110 million and having a four-year expected life, after which the assets can be salvaged for $22 million. In addition, the division has $110 million in assets that are not depreciable. After four years, the division will have $110 million available from these nondepreciable assets. This means that the division has invested $220 million in assets with a salvage value of $132 million. Annual depreciation is $22 million. Annual operating cash flows are $59 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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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