The Ste. Marie Division of Pacific Media Corporation just started operations. It

Question

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $55 million and having a four-year expected life, after which the assets can be salvaged for $11 million. In addition, the division has $55 million in assets that are not depreciable. After four years, the division will have $55 million available from these nondepreciable assets. This means that the division has invested $110 million in assets with a salvage value of $66 million. Annual depreciation is $11 million. Annual operating cash flows are $20 million. In computing ROl, 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 End of Year Replacement Cost Annual Cash Flow $110,000,000 ×1.1= $121,000,000 $20,000,000 ×1.1= $22,000,000 $121,000,000 1.1= $133,100,000 $ 22,000,000 x1.1= $24,200,000 Etc Etc. 4 Depreciation is as follows Year 1 "Accumulated" (= 10% For the Year $12.100,000 13,310,000 14,641,000 16,105,100 $121,000,000) 133,100,000) $12,100,000 26,620,000 (= 20% 43,923,000 64,420,400 4 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. & b. Compute ROl using historical cost, net book value and gross book value. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).) Historical ROI Ost Net Book Value Gross Book Value Year 1 Year 2 Year 3 Year 4 c. & d. Compute ROl using current cost, net book value and gross book value. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).) Current ROI Ost Year 1 Year 2 Year 3 Year 4 Net Book Value Gross Book Value

Explanation / Answer

On Historical Cost

when ROI is calculated on historical cost, the hoistorical cost will remain same for all 4 years

In gross asset method, ROI will be lower because denominator is smaller as compared to Net Assets

On current cost, use net operating plus salvage value as income and current relacement cost as dennominator. Depreciation is provided on current replacement cost as well to arrive at net assets.

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