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| Note that "accumulated" depreciation is 10 percent of the gross book value of depreciable assets after one year, 20 percent after two years, and so forth. |
Exercise 14-32 Compare Current Cost to Historical Cost (LO 14-2, 5) The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $20 million and having a four-year expected life, after which the assets can be salvaged for $4 million. In addition, the division has $20 million in assets that are not depreciable. After four years, the division will have $20 million available from these non-depreciable assets. This means that the division has invested $40 million in assets with a salvage value of $24 million. Annual depreciation is $4 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-ine basis, recognizing the salvage values noted. Ignore taxes. 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: Annual Cash Flow End of Year Replacement Cost 40,000,000 x 1.1 44,000,000 15,000,000 x 1.1 16,500,000 44,000,000 x 1.1 48,400,000 16,500,000 x 1.1 18,150,000 Etc Etc Depreciation is as follows Year For the Year Accumulated 1 4,400,000 4,400,000 10% x $44,000,000) 2 4,840,000 9,680,000 20% x 48,400,000) 5,324,000 15.972.000 5,856,400 23,425,600 Note that "accumulated" depreciation is 10 percent of the gross book value of depreciable assets after one year 20 percent after two years, and so forth Required: (a) Compute ROI using historical cost, net book value and gross book value. (Do not round intermediate calculations. Round your answers to 1 decimal place.) ROI Net book ROI Gross Historical cost value book value Year 1 Year 2 Year 3 Year 4 Exercise 14-32 Compare Current Cost to Historical Cost (LO 14-2, 5) The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $20 million and having a four-year expected life, after which the assets can be salvaged for $4 million. In addition, the division has $20 million in assets that are not depreciable. After four years, the division will have $20 million available from these non-depreciable assets. This means that the division has invested $40 million in assets with a salvage value of $24 million. Annual depreciation is $4 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-ine basis, recognizing the salvage values noted. Ignore taxes. 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: Annual Cash Flow End of Year Replacement Cost 40,000,000 x 1.1 44,000,000 15,000,000 x 1.1 16,500,000 44,000,000 x 1.1 48,400,000 16,500,000 x 1.1 18,150,000 Etc Etc Depreciation is as follows Year For the Year Accumulated 1 4,400,000 4,400,000 10% x $44,000,000) 2 4,840,000 9,680,000 20% x 48,400,000) 5,324,000 15.972.000 5,856,400 23,425,600 Note that "accumulated" depreciation is 10 percent of the gross book value of depreciable assets after one year 20 percent after two years, and so forth Required: (a) Compute ROI using historical cost, net book value and gross book value. (Do not round intermediate calculations. Round your answers to 1 decimal place.) ROI Net book ROI Gross Historical cost value book value Year 1 Year 2 Year 3 Year 4
