Question

6) Three years ago, one division of the Calsone Enterprise Company purchased depreciable assets costing $2,000,000. The cash flows from these assets for the past three years have been: Year Cash flows 1 $ 600,000 2 700,000 3 810,000 Calsone uses the straight-line depreciation method and the assets had an estimated useful life of 10 years with no salvage value. Required: a. What was the ROI for each year using historical cost and gross book value? b. What was the ROI for each year using historical cost and net book value?

Answer 1

Total cost of the assets = $2,000,000
Useful life of assets = 10 years
Depreciation per year as per Straight-line method = $2,000,000/10 = $200,000 per year

ROI = Net Income/Total Investments

Year	Cash flows	Gross Book value	Accumulated depreciation	Net Book Value	ROI - Gross Book value	ROI - Net Book Value
a	b	c	d	e = c-d	f = b/c	g = b/e
1	$      600,000	$ 2,000,000	$       200,000	$        1,800,000	30.00%	33.33%
2	$      700,000	$ 2,000,000	$       400,000	$        1,600,000	35.00%	43.75%
3	$      810,000	$ 2,000,000	$       600,000	$        1,400,000	40.50%	57.86%