San Mateo Division of California Metals Corporation just started operations. It purchased depreciable assets costing $2 million and having an expected life of four years, after which the assets can be salvaged for $400,000. In addition, the division has $2 million in assets that are not depreciable. After four years, the division will have $2 million available from these nondepreciable assets. In short, the division has invested $4 million in assets that will last four years, after which it will salvage $2.4 million, so annual depreciation is $400,000. Annual cash-operating flows are $1,000,000. 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.

785 Exercise 18.28 Impact of New Project on Performance Measures

(LO 5)

Exercise 18.29 Impact of Purchasing versus Leasing on Performance Measures

(LO 5,7)

Exercise 18.30 Alternative Measures of Division Performance

(LO 5,7)

Exercise 18.31 ROI and Residual Income;

Annual Reports; Use of Internet

(LO 5,7)

Exercise 18.32 Compare ROI Using Historical Cost Net Book Value versus Gross Book Value

(LO 5,8)

eXcel mhhe, com/nilton4e 786 Exercise 18.33 Calculation of Weighted-

Average Cost of Capital for EVA

(LO 5)

Exercise 18.34 Economic Value Added;

Continuation of Preceding Exercise

{LO 5)

Problems Problem 18.35 Responsibility Centers Designation; Hotel

(ROR 2S)

Part5 Evaluating and Managing Performance Required

a. Compute ROI using net book value for each year.

b. Compute ROI using gross book value for each year.

c. Assume the same data except that the division uses beginning-of-year asset values in the denominator for computing ROI.

(1) Compute ROI using net book value.

(2) Compute ROI using gross book value.

(3) How different is the ROI computed using end-of-year asset values from the ROI using beginning-

of-year values?