The Caribbean Division of Mega-Entertainment Corporation just started operations

Question

The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $25 million and having a four-year expected life, after which the assets can be salvaged for $5 million. In addition, the division has $25 million in assets that are not depreciable. After four years, the division will have $25 million available from these non-depreciable assets. This means that the division has invested $50 million in assets with a salvage value of $30 million. Annual depreciation is $5 million. Annual operating cash flows are $12.5 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:

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.

Compute ROI using historical cost, net book value and gross book value. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

  

Compute ROI using current cost, net book value and gross book value. (Do not round intermediate calculations. Round your answers to 1 decimal place.)

End of Year Replacement Cost Annual Cash Flow 1 $ 50,000,000 × 1.1 = $ 55,000,000 $ 12,500,000 × 1.1 = $ 13,750,000 2 $ 55,000,000 × 1.1 = $ 60,500,000 $ 13,750,000 × 1.1 = $ 15,125,000 3 Etc. Etc. 4

Explanation / Answer

Return on investment using historical cost method:

Answer for question no.a:

Answer for question no.b:

Year Operating cash flows (A) Depreciation(B) Opening asset value (C ) Closing asset value (D) Operating cashflows after depreciation    (E )=(A)-(B) ROI (G)= (E )/(F) 1 $12,500,000.00 $5,000,000.00 $50,000,000.00 $45,000,000.00 $7,500,000.00 16.67% 2 $13,750,000.00 $5,000,000.00 $45,000,000.00 $40,000,000.00 $8,750,000.00 21.88% 3 $15,125,000.00 $5,000,000.00 $40,000,000.00 $35,000,000.00 $10,125,000.00 28.93% 4 $16,637,500.00 $5,000,000.00 $35,000,000.00 $30,000,000.00 $11,637,500.00 38.79%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.