The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $36 million and having a four-year expected life, after which the assets can be salvaged for $7.2 million. In addition, the division has $36 million in assets that are not depreciable. After four years, the division will have $36 million available from these nondepreciable assets. This means that the division has invested $72 million in assets with a salvage value of $43.2 million. Annual operating cash flows are $12 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 8 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. Year 1 Year 2 Year 3 Year 4 Residual Income Net Book Gross Book Value Value $ (384,000) $ 192,000 $ 768,000 $ (960,000) $ (960,000) $ (960,000) $1,344,000 $ (960,000)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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The Street Division of Labrosse Logistics has just begun operations with the following setup:

- Purchased assets costing $36 million that depreciate over four years, with a salvage value of $7.2 million.
- Additional $36 million in non-depreciable assets.
- Total investment in assets: $72 million, including a salvage value of $43.2 million.
- Annual operating cash flows are $12 million.
- Return on Investment (ROI) uses end-of-year asset values.
- Depreciation is on a straight-line basis, and taxes are ignored.
- Company's cost of capital: 8 percent.

**Task:**

Compute residual income using two methods: 
- Net book value for each year.
- Gross book value for each year.

(Note: All answers should be in thousands of dollars. Negative amounts should be indicated with a minus sign.)

**Data Table:**

Residual Income:

- **Net Book Value:**
  - Year 1: ($384,000)
  - Year 2: $192,000
  - Year 3: $768,000
  - Year 4: $1,344,000

- **Gross Book Value:**
  - Year 1: ($960,000)
  - Year 2: ($960,000)
  - Year 3: ($960,000)
  - Year 4: ($960,000)
Transcribed Image Text:The Street Division of Labrosse Logistics has just begun operations with the following setup: - Purchased assets costing $36 million that depreciate over four years, with a salvage value of $7.2 million. - Additional $36 million in non-depreciable assets. - Total investment in assets: $72 million, including a salvage value of $43.2 million. - Annual operating cash flows are $12 million. - Return on Investment (ROI) uses end-of-year asset values. - Depreciation is on a straight-line basis, and taxes are ignored. - Company's cost of capital: 8 percent. **Task:** Compute residual income using two methods: - Net book value for each year. - Gross book value for each year. (Note: All answers should be in thousands of dollars. Negative amounts should be indicated with a minus sign.) **Data Table:** Residual Income: - **Net Book Value:** - Year 1: ($384,000) - Year 2: $192,000 - Year 3: $768,000 - Year 4: $1,344,000 - **Gross Book Value:** - Year 1: ($960,000) - Year 2: ($960,000) - Year 3: ($960,000) - Year 4: ($960,000)
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