Upper Division of Lower Company acquired an asset with a cost of $560,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows.
Year | Cash Flow | ||
1 | $ | 210,000 | |
2 | 245,000 | ||
3 | 275,000 | ||
4 | 345,000 | ||
The cost of the asset is expected to increase at a rate of 10 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes.
Required:
a. What is the ROI for each year of the asset's life, using a historical cost approach?
b. What is the ROI for each year of the asset's life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year?
Upper Division of Lower Company acquired an asset with a cost of $560,000 and a four-year...
Upper Division of Lower Company acquired an asset with a cost of $560,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows. Year Cash Flow 1 $ 195,000 2 255,000 3 290,000 4 325,000 The cost of the asset is expected to increase at a rate of 20 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes. Required:...
Upper Division of Lower Company acquired an asset with a cost of $590,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows. Year Cash Flow 1 $ 210,000 2 265,000 3 285,000 4 325,000 The cost of the asset is expected to increase at a rate of 20 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes. Required:...
Exercise 14-42 (Algo) Effects of Current Cost on Performance Measurements (LO 14-2, 5)Upper Division of Lower Company acquired an asset with a cost of $580,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows. YearCash Flow1$185,0002240,0003285,0004310,000 The cost of the asset is expected to increase at a rate of 20 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes. Required:a. What is...
A division is considering the acquisition of a new asset that will cost $2,800,000 and have a cash flow of $760,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes. YEAR INVESTMENT BASE ROI(%) RESIDUAL INCOME 1 $2,800,000 2 3 4 Required: a. & b. What is the ROI for each year of the asset's life if the division uses beginning-of-year asset balances and net...
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A division is considering the acquisition of a new asset that will cost $2,820,000 and have a cash flow of $780,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes. Required: a. & b. What is the ROI for each year of the asset's life if the division uses beginning-of-year asset balances and net book value for the computation? What is the residual income each...
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The Singer Division of Patio Enterprises currently earns $2.64 million and has divisional assets of $22.0 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,423,000 and will have a yearly cash flow of $852,000. The asset will be depreciated using the straight-line method over a six-year life and is expected to have no salvage value Divisional performance is measured using ROI with beginning-of-year net book...