A division is considering the acquisition of a new asset that will cost $2,520,000 and have a

Question:

A division is considering the acquisition of a new asset that will cost $2,520,000 and have a cash flow of $700,000 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. 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?
b. What is the residual income each year if the cost of capital is 8 percent?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...