A division is considering the acquisition of a new asset that will cost $3,000,0

Question

A division is considering the acquisition of a new asset that will cost $3,000,000 and have a cash flow of $780,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes. Required a. & b. What is the ROl for each year of the asset's life if the division uses beginning-of-year asset balances and net book value for the computation? What is the residual income each year if the cost of capital is 8 percent? (Enter "RO" answers as a percentage rounded to 1 decimal place (i.e., 32.1). Negative amounts should be indicated by a minus sign) Year Investment Residual Income ROI Base 1 S3,000 4

Explanation / Answer

Year Investment Base ROI Residual Value 1 3000000 26.00% $             5,40,000 2 2250000 34.67% $             6,00,000 3 1500000 52.00% $             6,60,000 4 750000 104.00% $             7,20,000

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