The Ste. Marie Division of Pacific Media Corporation juststarted operations. It purchased depreciable assets costing $45million and having a four-year expected life, after which theassets can be salvaged for $9 million. In addition, the divisionhas $45 million in assets that are not depreciable. After fouryears, the division will have $45 million available from thesenondepreciable assets. This means that the division has invested$90 million in assets with a salvage value of $54 million. Annualdepreciation is $9 million. Annual operating cash flows are $25million. In computing ROI, this division uses end-of-yearasset values in the denominator. Depreciation is computed on astraight-line basis, recognizing the salvage values noted. Ignoretaxes. Assume that all cash flows increase 10 percent at the end ofeach year. This has the following effect on the assets’ replacementcost and annual cash flows:
End ofYear
Replacement Cost
Annual Cash Flow
1
$
90,000,000
× 1.1 =
$
99,000,000
$
25,000,000
× 1.1 =
$
27,500,000
2
$
99,000,000
× 1.1 =
$
108,900,000
$
27,500,000
× 1.1 =
$
30,250,000
3
Etc.
Etc.
4
Depreciation is as follows:
Year
For the Year
“Accumulated”
1
$
9,900,000
$
9,900,000
(=10% × $99,000,000)
2
10,890,000
21,780,000
(= 20% ×108,900,000)
3
11,979,000
35,937,000
4
13,176,900
52,707,600
Note that “accumulated” depreciation is 10 percent of the grossbook value of depreciable assets after one year, 20 percent aftertwo years, and so forth.
Required:
a. & b. Compute ROI using historical cost,net book value and gross book value. (Enter your answers asa percentage rounded to 1 decimal place (i.e., 32.1).)
c. & d. Compute ROI using current cost, netbook value and gross book value. (Enter your answers as apercentage rounded to 1 decimal place (i.e., 32.1).)
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