Q14-30 and q14-31
Impact of an Asset Disposal on Performance Measures Refer to the facts in Exercise 14-28, but assume that Noonan has been leasing the machine for $60,000 annually. Assume also that the machine generates income of $42,000 annually after the lease payment. Noonan can cancel the lease on the machine without penalty at any time. Required Noonan computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset? Noonan computers residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Noonan retais the asset? What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)? Compare Historical Cost, Net Book Value to Gross Book Value The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $30 million and having a four-year expected life, after which the assets can be salvaged for $6 million. In addition, the division has $30 million in assets that are not depreciable. After four years, the division will have $30 million available from these non-depreciable assets. This means that the division has invested $6 million. Annual operating cash flows are $15 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxex. Compute ROI, using net book value for each year. Compute ROI, using gross book value for each year. Compare ROI Using Net Book and Gross Book Values Refer to the data in Exercise 14-30. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI. Compute ROI, using net book value. Compute ROI, using gross book value. If you worked Exercise 14-30, compare those results with those in this exercise. How different is the ROI computed using end-of year asset values, as in Exercise 14-30, from the ROI using beginning-of-year values in this exercise? Compare Current Cost to Historical Cost Refer to the information in Exercise 14-30. In computing ROI, this division uses end-of-year asset values. Assume that all cash flows increase 10 percent at the end of each year. This has the following effect on the assets' replacement cost and annual cash flows: Impact of an Asset Disposal on Performance Measures Refer to the facts in Exercise 14-28, but assume that Noonan has been leasing the machine for $60,000 annually. Assume also that the machine generates income of $42,000 annually after the lease payment. Noonan can cancel the lease on the machine without penalty at any time. Required Noonan computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset? Noonan computers residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Noonan retais the asset? What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)? Compare Historical Cost, Net Book Value to Gross Book Value The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $30 million and having a four-year expected life, after which the assets can be salvaged for $6 million. In addition, the division has $30 million in assets that are not depreciable. After four years, the division will have $30 million available from these non-depreciable assets. This means that the division has invested $6 million. Annual operating cash flows are $15 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxex. Compute ROI, using net book value for each year. Compute ROI, using gross book value for each year. Compare ROI Using Net Book and Gross Book Values Refer to the data in Exercise 14-30. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI. Compute ROI, using net book value. Compute ROI, using gross book value. If you worked Exercise 14-30, compare those results with those in this exercise. How different is the ROI computed using end-of year asset values, as in Exercise 14-30, from the ROI using beginning-of-year values in this exercise? Compare Current Cost to Historical Cost Refer to the information in Exercise 14-30. In computing ROI, this division uses end-of-year asset values. Assume that all cash flows increase 10 percent at the end of each year. This has the following effect on the assets' replacement cost and annual cash flows
