The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets...
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Accounting
The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $50 million and having a four-year expected life, after which the assets can be salvaged for $10 million. In addition, the division has $50 million in assets that are not depreciable. After four years, the division will have $50 million available from these nondepreciable assets. This means that the division has invested $100 million in assets with a salvage value of $60 million. Annual depreciation is $10 million. Annual operating cash flows are $23 million. In computing ROI, this division usesend-of-year assetvalues 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.
Residual Income
Net Book Value Gross Book Value
Year 1 __________________ ______________________
Year 2___________________ ____________________
Year3___________________ __________________
Year4___________________ ____________________
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