Question

Problems and Investments Ch 12 Saved Help Save & Exit Su Check my wou Problem 12-23 Accounting measures of performance Conder an asset with the following cash flows: Cash flows ($ millions) Year 0 -54 Year 1 23.40 Year 2 21.60 Year 3 19.80 The firm uses straight-line depreciation. Thus, for this project, it writes off $18 million per year in years 1. 2. and 3. The discount rate is 10%. a. Complete the following table. b. Does the economic depreciation equal the book dep..ciation? c. Is the book rate of return the same in each year? d. Is the project's book profitability its true profitability? Complete this question by entering your answers in the tabs below. Reg a Reqb to d Complete the following table. (Leave no cells blank - be certain to enter "0" wherever required. Round your cash flow, economic income, economic rate of return, book income, and book rate of return answers to 2 decimal places. All other answers should be rounded to the nearest whole number. Input the rates of return as decimal values, not percents and other answers in millions not in dollars. Negative answers should be indicated with a minus sign.) Show less < Prev 7 of 8 !!! Next >

Answer 1

Solution :-

Economic income = Cash flow + Change in Present Value

Economic Depreciation = Cash flow - Economic Income per year

Book value return = Book Income / Investment for previous Year

Economic value return = Economic Income / Investment for previous Year

Company writes off Every Year = $18 million

Discount Rate = 10%

Book Income for year 1 = [ cash flow - Book Dep ] = [ $23.40 - $18 ] = $5.40

Book Income for year 2 = [ cash flow - Book Dep ] = [ $21.60 - $18 ] = $3.60

Book Income for year 3 = [ cash flow - Book Dep ] = [ $19.80 - $18 ] = $1.80

Book Value Return for Year 1 = Book Income / Investment for previous Year = $5.4 / $54 = 10%

Book Value Return for Year 2 = Book Income / Investment for previous Year = $3.6 / $36 = 10%

Book Value Return for Year 1 = Book Income / Investment for previous Year = $1.8 / $18 = 10%

(A)

Year	0	1	2	3
Cash Flow	($54)	$23.40	$21.60	$19.80
Book Depreciation		($18)	($18)	($18)
Book Income		$5.40	$3.60	$1.80
Book value	$54	$36	$18	$0
Rate of return		10%	10%	10%

Table for Economic return , Economic Dep and Economic Income
Year	0	1	2	3
Opening Book Value		$54.00	$36.00	$18.00
Closing Book Value		$36.00	$18.00	$0.00
Change in Book Value		($18.00)	($18.00)	($18.00)
Cashflow	($54)	$23.40	$21.60	$19.80
Economic Income		$5.40	$3.60	$1.80
( Cashflow + Change in BV )
Economic Depreciation		$18.00	$18.00	$18.00
( Cashflow - Economic Income )
Economic Value of Investment	$54	$36	$18	$0
Economic Return		10%	10%	10%
( Income / Previous Investment )

(B)

Yes the Economic Dep is Equal to Book Value Dep ( Proved in above table )

(C)

Yes the Book Value of return is Same in every year ( Proved in above table )

(D)

Yes it is true profitability as the Book value return and economic rate of retun is equal to discount rate ...

If there is any doubt please ask in comments

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