Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 29

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 nondepreciable assets. This means that the division has invested $60 million in assets with a salvage value of $36 million. Annual depreciation is $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 taxes.

Required

a. Compute ROI, using net book value for each year.

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b. Compute ROI, using gross book value for each year.

Step 1 of 5

Given,

Total assets invested (Gross Book value) are $60 million

Salvage value of assets at the end of the 4^th year are $36 million

Annual operating cash flows are $15 million

Annual depreciation is $6 million