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Compare Current Cost to Historical Cost Refer to the information in Exercise 14-29 In computing ROI, this division uses end-of-year asset values Assume that all cash flows increase 10 percent at

Compare Current Cost to Historical Cost

Refer to the information in Exercise 14-29. In computing ROI, this division uses end-of-year asset values. 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

$60,000,000 x 1.1 = $66,000,000

$15,000,000 x 1.1 = $16,500,000

2

$66,000,000 x 1.1 = $72,600,000

$16,500,000 x 1.1 = $18,150,000

3

Etc.

Etc.

4

 

 

Depreciation is as follows:

Year

For the Year

“Accumulated”

1

$6,600,000

$ 6,600,000 (= 10% x $66,000,000)

2

7,260,000

14,520,000 (= 20% x 72,600,000)

3

7,986,000

23,958,000

4

8,784,600

35,138,400

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. Compute ROI using historical cost, net book value.

b. Compute ROI using historical cost, gross book value.

c. Compute ROI using current cost, net book value.

d. Compute ROI using current cost, gross book value.

Exercise 14-29: Compare Historical Cost, Net Book Value to Gross Book Value

The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $30 million and having a four-year expected life, after which the assets can be salvaged for $6 million. In addition, the division has $30 million in assets that are not depreciable. After four years, the division will have $30 million available from these non depreciable assets. This means that the division has invested $60 million in assets with a salvage value of $36 million. Annual depreciation is $6 million. Annual operating cash flows are $15 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.

Required

a. Compute ROI, using net book value for each year.

b. Compute ROI, using gross book value for each year.

Jun 19 2020 View more View Less

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