Question

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $43.0 million and having a four-year expected life, after which the assets can be salvaged for $8.6 million. In addition, the division has $43.0 million in assets that are not depreciable. After four years, the division will have $43.0 million available from these nondepreciable assets. This means that the division has invested $86.0 million in assets with a salvage value of $51.6 million. Annual depreciation is $8.6 million. Annual operating cash flows are $21.7 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Required: a. & b. Compute ROI, using net book value and gross book value for each year. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

Answer 1

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Gross Value method	Year 1	Year 2	Year 3	Year 4			Net Value method	Year 1	Year 2	Year 3	Year 4
Depreciable asset value	43.00	43.00	43.00	43.00	A		Total Gross Value	86.00	77.40	68.80	60.20	C
Non Depreciable asset value	43.00	43.00	43.00	43.00	B		Annual depreciation	8.60	8.60	8.60	8.60	E
Total Gross Value	86.00	86.00	86.00	86.00	C=A+B		Net Gross Value	77.40	68.80	60.20	51.60	H=C-E
Net operating cash flows	13.10	13.10	13.10	13.10	F		Net operating cash flows	13.10	13.10	13.10	13.10	F
ROI	15.23%	15.23%	15.23%	15.23%	G=F/C		ROI	16.93%	19.04%	21.76%	25.39%	I=F/H
Annual operating cash flows	21.70	D
Less: Annual depreciation	8.60	E
Net operating cash flows	13.10	F=D-E