Question

A division is considering the acquisition of a new asset that will cost $2,520,000 and have a cash flow of $730,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes. Required: a. & b. What is the ROI for each year of the asset's life if the division uses beginning-of-year asset balances and net book value for the computation? What is the residual income each year if the cost of capital is 8 percent? (Enter "ROI" answers as a percentage rounded to 1 decimal place (i.e., 32.1). percentage rounded to 1 decimal place (i.e., 32.1). Negative amounts should be indicated by a minus sign.)

YEAR      INVESTMENT BASE        ROI       RESIDENTIAL INCOME

1                2520000                               %     $

2

3

4

Answer 1

Annual cash flow Less : Depreciation=2520000/4 Net income 730000 -630000 100000 Year Beg. Book value (Investment base) Depreciation End book value ROINNet income/net book value Residual Income -Net income-Net book value x cost of capital c=a-b d=100000/a e=100000-a*0.08 2520000 630000 1890000 4.0% -101600) 1890000 630000 1260000 5.3% -51200 1260000 630000 630000 7.9% -800 630000 630000 15.9% 49600) 0