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The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing...

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Accounting

The Ste. Marie Division of Pacific Media Corporation juststarted operations. It purchased depreciable assets costing $39million and having a four-year expected life, after which theassets can be salvaged for $7.8 million. In addition, the divisionhas $39 million in assets that are not depreciable. After fouryears, the division will have $39 million available from thesenondepreciable assets. This means that the division has invested$78 million in assets with a salvage value of $46.8 million. Annualdepreciation is $7.8 million. Annual operating cash flows are $20million. Depreciation is computed on a straight-line basis,recognizing the salvage values noted. Ignore taxes. Assume that thedivision uses beginning-of-year asset values in thedenominator for computing ROI.

Required:

a. & b. Compute ROI, using net book valueand gross book value

ROI
Net Book ValueGross Book Value
Year 1%%
Year 2%%
Year 3%%
Year 4%%

Answer & Explanation Solved by verified expert
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Solution:

Computation of annual Operating Income
Particulars Amount (In million)
Annual operating cash flows $20.00
Less: Depreciation $7.80
Annual operating income $12.20
Computation of Gross book value and net book value of assets at the end of each year
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Gross Book value of Assets $78.00 $78.00 $78.00 $78.00 $78.00
Less: Accumulated depreciation $0.00 $7.80 $15.60 $23.40 $31.20
Net Book Value $78.00 $70.20 $62.40 $54.60 $46.80
Computation of ROI
Particulars Year 1 Year 2 Year 3 Year 4
Using Gross Book Value
Net operarting income $12.20 $12.20 $12.20 $12.20
Gross book value of asset at beginning $78.00 $78.00 $78.00 $78.00
ROI (Net operating income / Gross assets book value) 15.64% 15.64% 15.64% 15.64%
Using Net Book Value
Net operarting income $12.20 $12.20 $12.20 $12.20
Net book value of asset at beginning $78.00 $70.20 $62.40 $54.60
ROI (Net operating income / Net assets book value) 15.64% 17.38% 19.55% 22.34%

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