Compare ROI Using Net Book and Gross Book Values
Refer to the data in Exercise 14 29. Assume that the division uses beginning of year asset values in the denominator for computing ROI.
Required
a. Compute ROI, using net book value.
b. Compute ROI, using gross book value.
c. If you worked Exercise 14 29, compare those results with those in this exercise. How different is the ROI computed using end of year asset values, as in Exercise 14 29, from the ROI using beginning of year values in this exercise?
Exercise 14 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 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.