Homework SourseThe Ste Marie Division of Pacific Media Corporation just sta
The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $39 million and having a four-year expected life, after which the assets can be salvaged for $7.8 million. In addition, the division has $39 million in assets that are not depreciable. After four years, the division will have $39 million available from these nondepreciable assets. This means that the division has invested $78 million in assets with a salvage value of $46.8 million. Annual depreciation is $7.8 million. Annual operating cash flows are $20 million. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI.
Required:
a. & b. Compute ROI, using net book value and gross book value
| The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $39 million and having a four-year expected life, after which the assets can be salvaged for $7.8 million. In addition, the division has $39 million in assets that are not depreciable. After four years, the division will have $39 million available from these nondepreciable assets. This means that the division has invested $78 million in assets with a salvage value of $46.8 million. Annual depreciation is $7.8 million. Annual operating cash flows are $20 million. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI. Required: a. & b. Compute ROI, using net book value and gross book value | |||||||||||||||||||||||||
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Solution
Solution:
| Computation of annual Operating Income | |
| Particulars | Amount (In million) |
| Annual operating cash flows | $20.00 |
| Less: Depreciation | $7.80 |
| Annual operating income | $12.20 |
