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