Upper Division of Lower Company acquired an asset with a cost of $560,000 and a

Question

Upper Division of Lower Company acquired an asset with a cost of $560,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows: Year Cash Flow 1 $ 178,000 2 210,000 3 226,000 4 250,000 The cost of the asset is expected to increase at a rate of 10 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes. Required: (a) What is the ROI for each year of the asset's life, using a historical cost approach? (Do not round intermediate calculations. Round your answers to 1 decimal place.) (b) What is the ROI for each year of the asset's life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year? (Do not round intermediate calculations. Round your answers to 1 decimal place.)

Explanation / Answer

Historical cost approach Assests Cost           560,000 Average Cash Flow for four year 216000 ROI on historical 38.6% ROI each year on current cost method Asssets Value Return   ROI% Year 1 616000 178000 28.9% Year 2 677600 210000 31.0% Year 3 745360 226000 30.3% Year 4 819896 250000 30.5%

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