Compare Historical Cost, Net Book Value to Gross Book Value: Raiders Division of Shark Company just started
Question:
Compare Historical Cost, Net Book Value to Gross Book Value: Raiders Division of Shark Company just started operations. It purchased depreciable assets costing $1 million and having an expected life of four years, after which the assets can be salvaged for $200,000. In addition, the division has $1 million in assets that are not depreciable. After four years, the division will have $1 million available from these nondepreciable assets. In short, the division has invested $2 million in assets that will last four years, after which it will salvage $1.2 million. Annual cash operating flows are $400,000. 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 above.
Required:
a. Compute ROI, using net book value.
b. Compute ROI, using gross book value.
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