Question

The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $47 million and having a four-year expected life, after which the assets can be salvaged for $9.4 million. In addition, the division has $47 million in assets that are not depreciable. After four years, the division will have $47 million available from these nondepreciable assets. This means that the division has invested $94 million in assets with a salvage value of $56.4 million. Annual depreciation is $9.4 million. Annual operating cash flows are $27 million. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI.

Required:

a. & b. Compute ROI, using net book value and gross book value. (Enter your answers as a percentage rounded to 1 decimal place (i.e., 32.1).)

ROI
Net Book Value		Gross Book Value
Year 1		%		%
Year 2		%		%
Year 3		%		%
Year 4		%		%

Answer 1

Answer:

	Net Book Value	Gross Book Value
Year 1	20.8%	18.7%
Year 2	23.4%	18.7%
Year 3	26.7%	18.7%
Year 4	31.2%	18.7%

Calculation:

We need to calculate the ROI, using net book value and gross book value. Return on Investment measure is used to evaluate the efficiency of the investment.

When we use the net book value method, the accumulated depreciation is deducted from the original cost.

When we use the gross book value method, we need to take the original cost of long-term assets and doesnt take the accumulated depreciation.

So using Net book value method we need to take the Annual operating cash flows and deduct  Annual depreciation. Then divide it with the Investment minus annual depreciation. From year 2 to 4 we need to multiply the annual depreciation deducted with the years.

So using Gtoss book value method we need to take the Annual operating cash flows and deduct  Annual depreciation. Then divide it with the Investment.

Year 1:

Net Book Value:

ROI = ($27,000,000 – $9,400,000) / ($94,000,000 – $9,400,000) =

$17,600,000 / $84,600,000 = 20.8%

Gross Book Value:

ROI = ($27,000,000 – $9,400,000) / $94,000,000 = $17,600,000 / $94,000,000 = 18.7%

Year 2:

Net Book Value:

ROI = ($27,000,000 – $9,400,000) / ($94,000,000 – (2 x $9,400,000)) =

$17,600,000 / $75,200,000 = 23.4%

Gross Book Value:

ROI = ($27,000,000 – $9,400,000) / $94,000,000 = $17,600,000 / $94,000,000 = 18.7%

Year 3:

Net Book Value:

ROI = ($27,000,000 – $9,400,000) / ($94,000,000 – (3 x $9,400,000)) =

$17,600,000 / $65,800,000 = 26.7%

Gross Book Value:

ROI = ($27,000,000 – $9,400,000) / $94,000,000 = $17,600,000 / $94,000,000 = 18.7%

Year 4:

Net Book Value:

ROI = ($27,000,000 – $9,400,000) / ($94,000,000 – (4 x $9,400,000)) =

$17,600,000 / $56,400,000 = 31.2%

Gross Book Value:

ROI = ($27,000,000 – $9,400,000) / $94,000,000 = $17,600,000 / $94,000,000 = 18.7%