Question

A division is considering the acquisition of a new asset that will cost $2,780,000 and have a cash flow of $740,000 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 year if the cost of capital is 8 percent? (Enter "ROI" answers as a percentage rounded to 1 decimal place (i.e., 32.1). Negative amounts should be indicated by a minus sign.)

Year	Investment Base	ROI		Residual Income
1	$ 2,780,000.00		%
2			%
3			%
4			%

Answer 1

Year	Investment Base	ROI = 45000/Investment Base	Residual Income =  $45,000 – (8% ×  Investment Base)
1	27,80,000.00	1.62%	-177400
2	20,85,000.00	2.16%	-121800
3	13,90,000.00	3.24%	-66200
4	6,95,000.00	6.47%	-10600
Base decreases by annual depreciation
Annual depreciation = 2780000/4	6,95,000.00
Annual income = $740,000 - $695,000(dep.)	45,000.00