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Category > Management Posted 10 Dec 2017 My Price 8.00

Pacific Media Corporation

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $45 million and having a four-year expected life, after which the assets can be salvaged for $9 million. In addition, the division has $45 million in assets that are not depreciable. After four years, the division will have $45 million available from these nondepreciable assets. This means that the division has invested $90 million in assets with a salvage value of $54 million. Annual depreciation is $9 million. Annual operating cash flows are $25 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 $ 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 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. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

c. & d. Compute ROI using current cost, net book value and gross book value. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

 

Answers

Maurice Tutor
(5)
Status NEW Posted 10 Dec 2017 08:12 PM My Price 8.00

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