Problem 12-24 Accounting measures of performance The table given below shows how, on average, the market value of a Boeing 737 has varied with its age and the cash flow needed in each year to provide a 11% return. (For example, if you bought a 737 for $20.05 million at the start of year 1 and sold it a year later, your total profit would be 18.17 +4.09 - 20.05 = $2.21 million, 11% of the purchase cost.) Assume airlines write off their aircraft straight-line over 15 years to a salvage value equal to 25% of the original cost. Cash Flow Start of Year 1 2 3 4 5 6 7 8 Market Value 29.05 18.17 17.15 15.96 15.25 14.27 13.72 12.86 12.41 11.64 11.22 10.57 10.27 9.62 9.37 8.77 4.09 3.02 3.08 2.47 2.66 2.12 2.37 1.86 2.14 1.65 1.94 9 10 11 12 13 14 15 16 1.46 1.78 1.31 1.63 a. Calculate economic depreciation, book depreciation, economic return, and book return for each year of the plane's life. (Leave no cells blank - be certain to enter "o" wherever required. Do not round Intermediate calculations. Enter your answers in millions except for percentage values. Round your percentage answers to 1 decimal place and other answers to 2 decimal places.) Start of Year Economic depreciation Book depreciation Economic return (%) Book return (%) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 b-1. Suppose an airline Invested in a fixed number of Boeing 737s each year. Calculate the steady-state book rate of return. (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Steady-state book rate of return b-2. Would steady-state book return overstate or understate true return? O Understate Overstate Problem 12-24 Accounting measures of performance The table given below shows how, on average, the market value of a Boeing 737 has varied with its age and the cash flow needed in each year to provide a 11% return. (For example, if you bought a 737 for $20.05 million at the start of year 1 and sold it a year later, your total profit would be 18.17 +4.09 - 20.05 = $2.21 million, 11% of the purchase cost.) Assume airlines write off their aircraft straight-line over 15 years to a salvage value equal to 25% of the original cost. Cash Flow Start of Year 1 2 3 4 5 6 7 8 Market Value 29.05 18.17 17.15 15.96 15.25 14.27 13.72 12.86 12.41 11.64 11.22 10.57 10.27 9.62 9.37 8.77 4.09 3.02 3.08 2.47 2.66 2.12 2.37 1.86 2.14 1.65 1.94 9 10 11 12 13 14 15 16 1.46 1.78 1.31 1.63 a. Calculate economic depreciation, book depreciation, economic return, and book return for each year of the plane's life. (Leave no cells blank - be certain to enter "o" wherever required. Do not round Intermediate calculations. Enter your answers in millions except for percentage values. Round your percentage answers to 1 decimal place and other answers to 2 decimal places.) Start of Year Economic depreciation Book depreciation Economic return (%) Book return (%) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 b-1. Suppose an airline Invested in a fixed number of Boeing 737s each year. Calculate the steady-state book rate of return. (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Steady-state book rate of return b-2. Would steady-state book return overstate or understate true return? O Understate Overstate
