aeeounting versus eeonomie valuation This is a continuation of problem 7 in Chapter 2. Assume an organization is formed, by issuing common stock, to purchase and manage the asset that produces the net cash flows listed in the originaI problem. The purchase price of the asset is 24,211.14, a familiar datum. The cash flow at the end of each year is immediately paid out in adividend to the common stockholders.

a] Assume straight line depreciation is used, with no salvage value. Determine periodie income and end-of-period balanee sheets for the organization. (Treat the noted cash flow as revenue and depreciation as the only expense.)

b] Assume r = 11 % and use economic depreciation. You should treat the end-ofperiod value of the asset as the present value of the remaining cash flows, and depreciation as the change in value of the asset. Determine periodie income and end-of-period balanee sheets for the organization.

c] Why do the two income series agree in total? Why is eeonomic depreciation negative in one of the yeaes?

AppendixLO1