Exercise 14-26 (Algo) ROI versus RI (LO 14-2, 3)

A division is considering the acquisition of a new asset that will cost $2,950,000 and have a cash flow of $740,000 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. & b. 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? What is the residual income each year if the cost of capital is 8 percent? (Enter "ROI" answers as a percentage rounded to 1 decimal place (i.e., 32.1). Negative amounts should be indicated by a minus sign.)

Answer is complete but not entirely correct.

Year	Investment Base	ROI		Residual Income
1	$2,950,000	8.0selected answer incorrect	%	$(233,500)selected answer correct
2	2,212,500selected answer correct	11.0selected answer incorrect	%	(233,500)selected answer incorrect
3	1,475,000selected answer correct	17.0selected answer incorrect	%	(115,500)selected answer correct
4	737,500selected answer correct	34.0selected answer incorrect	%	(56,500)selected answer correct