Problem 12-23 Accounting measures of performance Consider an asset with the following cash flows: Cash flows ($ millions) Year -75 Year 1 32.50 Year 2 30.00 Year 3 27.50 The firm uses straight-line depreciation. Thus, for this project, it writes off $25 million per year in years 1, 2, and 3. The discount rate is 10% a. Complete the following table. b. Does the economic depreciation equal the book depreciation? c. Is the book rate of return the same in each year? d. Is the project's book profitability its true profitability? The table below shows a condensed income statement and balance sheet for Androscoggin Copper's Rumford smelting plant (figures in $ millions). Assume the cost of capital is 10% Income Statement for 2018 Assets, December 31, 2018 Revenue $56.96 Net working capital $ 7.95 Raw materials cost 18.69 Operating cost 21.06 Investment in plant and 69.63 equipment Depreciation 4.47 Less accumulated depreciation 21.04 Pretax income $12.74 Net plant and equipment $48.59 Tax at 21% 2.68 Net income $10.06 Total assets $55.64 a. Calculate the plant's EVA. (Enter your answer in millions rounded to 2 decimal places.) EVA million b. As the table above shows, the plant is carried on Androscoggin's books at $48.59 million. However, it is a modern design, and could be sold to another copper company for $98 million. How should this fact change your calculation of EVA? (Negative answers should Problem 12-19 EVA Herbal Resources is a small but profitable producer of dietary supplements for pets. This is not a high-tech business, but Herbal's eamings have averaged around $2.1 million after tax, largely on the strength of its patented enzyme for making cats nonallergenic. The patent has eight years to run, and Herbal has been offered $2.1 million for the patent rights. Herbal's assets include $3.9 million of working capital and $9.3 million of property, plant, and equipment. The patent is not shown on Herbal's books. Suppose Herbal's cost of capital is 14% What is its EVA? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) EVA million Use the cash flows and competitive spreads shown in the table below. (5 millions) Year 1 Year 2 Years 3-10 Year o 190 @ 1.84 1.04 Investment Production (millions of pounds per year) Spread ($ per pound) Net revenues Production costs Transport Other costs 49 1.04 50.96 39.00 89 1.04 92.56 39.00 29 29 29 Cash flow -190 -29 -17.04 24.56 NPV (at r = 6%) = 0 Assume the dividend payout ratio each year is 100%. a. Calculate the year-by-year book and economic profitability for investment in polyzone production. Assume straight-line depreciation over 10 years and a cost of capital of 6%. (Negative answers should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your income answers in millions rounded to 2 decimal places and enter the rate of return as a percent rounded to 2 decimal places.) Problem 12-15 Accounting measures of performance The Modern Language Corporation earned $2.1 million on net assets of $25 million. The cost of capital is 12.75%. Calculate the net ROI and EVA (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your "ROT" answer as a percent rounded to 2 decimal places, and enter your "EVA" answer in millions rounded to 2 decimal places.) % ROI EVA million 2 3 4 5 6 -65.40 34.60 -71.29 Book income for store 1 2 3 4 5 6 Total book income 84.60 37.71 -77.70 132.60 92.21 41.11 -84.69 132.60 144.53 100.51 44.81 -92.32 132.60 144.53 157.54 109.56 48.84 -100.63 492.44 -65.40 -36.69 44.61 181.23 330.13 Book value for store 1 2 3 4 5 6 1,003.61 836.34 669.07 501.80 334.53 167.26 1,093.93 911.61 729.29 546.96 364.64 1,192.39 993.66 794.92 596.19 1,299.70 1,083.09 866.47 1,416.68 1,180.56 1,544.18 1,093.61 1,930.27 2,773.07 3,524.45 4,176.18 4,719.30 Total book value Assume a steady-state growth rate of 9% per year. Calculate the book ROI. (Negative answers should be indicated by a minus sign Do not round intermediate calculations. Round your answers to 3 decimal places.) Problem 12-13 Economic income Consider the following project: 1 Period 2 91.55 @ -225 Net cash flow 3 253.25 The internal rate of return is 17%. The NPV, assuming a 17% opportunity cost of capital, is exactly zero. Calculate the expected economic income and economic depreciation in each year (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Period 2 1 3 Change in value (economic depreciation) Expected economic income Problem 12-23 Accounting measures of performance Consider an asset with the following cash flows: Cash flows ($ millions) Year -75 Year 1 32.50 Year 2 30.00 Year 3 27.50 The firm uses straight-line depreciation. Thus, for this project, it writes off $25 million per year in years 1, 2, and 3. The discount rate is 10% a. Complete the following table. b. Does the economic depreciation equal the book depreciation? c. Is the book rate of return the same in each year? d. Is the project's book profitability its true profitability? The table below shows a condensed income statement and balance sheet for Androscoggin Copper's Rumford smelting plant (figures in $ millions). Assume the cost of capital is 10% Income Statement for 2018 Assets, December 31, 2018 Revenue $56.96 Net working capital $ 7.95 Raw materials cost 18.69 Operating cost 21.06 Investment in plant and 69.63 equipment Depreciation 4.47 Less accumulated depreciation 21.04 Pretax income $12.74 Net plant and equipment $48.59 Tax at 21% 2.68 Net income $10.06 Total assets $55.64 a. Calculate the plant's EVA. (Enter your answer in millions rounded to 2 decimal places.) EVA million b. As the table above shows, the plant is carried on Androscoggin's books at $48.59 million. However, it is a modern design, and could be sold to another copper company for $98 million. How should this fact change your calculation of EVA? (Negative answers should Problem 12-19 EVA Herbal Resources is a small but profitable producer of dietary supplements for pets. This is not a high-tech business, but Herbal's eamings have averaged around $2.1 million after tax, largely on the strength of its patented enzyme for making cats nonallergenic. The patent has eight years to run, and Herbal has been offered $2.1 million for the patent rights. Herbal's assets include $3.9 million of working capital and $9.3 million of property, plant, and equipment. The patent is not shown on Herbal's books. Suppose Herbal's cost of capital is 14% What is its EVA? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) EVA million Use the cash flows and competitive spreads shown in the table below. (5 millions) Year 1 Year 2 Years 3-10 Year o 190 @ 1.84 1.04 Investment Production (millions of pounds per year) Spread ($ per pound) Net revenues Production costs Transport Other costs 49 1.04 50.96 39.00 89 1.04 92.56 39.00 29 29 29 Cash flow -190 -29 -17.04 24.56 NPV (at r = 6%) = 0 Assume the dividend payout ratio each year is 100%. a. Calculate the year-by-year book and economic profitability for investment in polyzone production. Assume straight-line depreciation over 10 years and a cost of capital of 6%. (Negative answers should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your income answers in millions rounded to 2 decimal places and enter the rate of return as a percent rounded to 2 decimal places.) Problem 12-15 Accounting measures of performance The Modern Language Corporation earned $2.1 million on net assets of $25 million. The cost of capital is 12.75%. Calculate the net ROI and EVA (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your "ROT" answer as a percent rounded to 2 decimal places, and enter your "EVA" answer in millions rounded to 2 decimal places.) % ROI EVA million 2 3 4 5 6 -65.40 34.60 -71.29 Book income for store 1 2 3 4 5 6 Total book income 84.60 37.71 -77.70 132.60 92.21 41.11 -84.69 132.60 144.53 100.51 44.81 -92.32 132.60 144.53 157.54 109.56 48.84 -100.63 492.44 -65.40 -36.69 44.61 181.23 330.13 Book value for store 1 2 3 4 5 6 1,003.61 836.34 669.07 501.80 334.53 167.26 1,093.93 911.61 729.29 546.96 364.64 1,192.39 993.66 794.92 596.19 1,299.70 1,083.09 866.47 1,416.68 1,180.56 1,544.18 1,093.61 1,930.27 2,773.07 3,524.45 4,176.18 4,719.30 Total book value Assume a steady-state growth rate of 9% per year. Calculate the book ROI. (Negative answers should be indicated by a minus sign Do not round intermediate calculations. Round your answers to 3 decimal places.) Problem 12-13 Economic income Consider the following project: 1 Period 2 91.55 @ -225 Net cash flow 3 253.25 The internal rate of return is 17%. The NPV, assuming a 17% opportunity cost of capital, is exactly zero. Calculate the expected economic income and economic depreciation in each year (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Period 2 1 3 Change in value (economic depreciation) Expected economic income