Question

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $35 million and having a four-year expected life, after which the assets can be salvaged for $7 million. In addition, the division has $35 million in assets that are not depreciable. After four years, the division will have $35 million available from these nondepreciable assets. This means that the division has invested $70 million in assets with a salvage value of $42 million. Annual depreciation is $7 million. Annual operating cash flows are $26 million. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI. Required: a. & b. Compute ROI, using net book value and gross book value. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).) ROI Net Book Value Gross Book Value Year 1 Year 2 Year 3 Year 4

Answer 1

a&b)

	ROI
	Net Book Value		Gross Book Value
Year 1	30.2	%	27.1	%
Year 2	33.9	%	27.1	%
Year 3	38.8	%	27.1	%
Year 4	45.2	%	27.1	%

Working notes:

a)	Net Book Value
Year 1 [($26,000,000 - $7,000,000) / ($70,000,000 - $7,000,000) * 100]	30.2%
Year 2 [($26,000,000 - $7,000,000) / ($70,000,000 - {$7,000,000*2})*100]	33.9%
Year 3 [($26,000,000 - $7,000,000) / ($70,000,000 - {$7,000,000*3})*100]	38.8%
Year 4 [($26,000,000 - $7,000,000) / ($70,000,000 - {$7,000,000*4})*100]	45.2%
b)	Gross Book Value
Year 1 [($26,000,000 - $7,000,000) / ($70,000,000) * 100]	27.1%
Year 2 [($26,000,000 - $7,000,000) / ($70,000,000) * 100]	27.1%
Year 3 [($26,000,000 - $7,000,000) / ($70,000,000) * 100]	27.1%
Year 4 [($26,000,000 - $7,000,000) / ($70,000,000) * 100]	27.1%