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

Exercise 31

Compare Current Cost to Historical Cost

Refer to the information in Exercise 14-29. 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:

End of Year	Replacement Cost	Annual Cash Flow
1	$60,000,000 × 1.1 = $66,000,000	$15,000,000 × 1.1 = $16,500,000
2	$66,000,000 × 1.1 = $72,600,000	$16,500,000×1.1 = $18,150,000
3	Etc.	Etc.
4

Depreciation is as follows:

Year	For the Year	“Accumulated”
1	$6,600,000	$ 6,600,000 (= 10% × $66,000,000)
2	7,260,000	14,520,000 (= 20% × 72,600,000)
3	7,986,000	23,958,000
4	8,784,600	35,138,400

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.

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b. Compute ROI using historical cost, gross book value.

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c. Compute ROI using current cost, net book value.

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d. Compute ROI using current cost, gross book value.

Step 1 of 7

The following information is given in the question:

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

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

3. Annual operating cash flows are $15 million.

4. Annual depreciation is $6 million.