The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $38.0 million and having a four-year expected life, after which the assets can be salvaged for $7.60 million. In addition, the division has $38.0 million in assets that are not depreciable. After four years, the division will have $38.0 million available from these nondepreciable assets. This means that the division has invested $76.0 million in assets with a salvage value of $45.60 million. Annual operating cash flows are $14.0 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. 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 1 2 3 4 Replacement Cost $76,000,000 x 1.1 = $83,600,000 $83,600,000 x 1.1 = $91,960,000 Etc. Depreciation is as follows. Year 1 2 3 4 For the Year $ 8,360,000 9,196,000 0,115,600 11,127,160 Annual Cash Flow $14,000,000 x 1.1 = $15,400,000 $15,400,000 x 1.1 = $16,940,000 Etc. "Accumulated" $8,360,000 (= 10% x $83,600,000) 18,392,000 (= 208 x 91,960,000) 30,346,800 44,508,640 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. & b. Compute ROI using historical cost, net book value and gross book value. c. & d. Compute ROI using current cost, net book value and gross book value.
The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $38.0 million and having a four-year expected life, after which the assets can be salvaged for $7.60 million. In addition, the division has $38.0 million in assets that are not depreciable. After four years, the division will have $38.0 million available from these nondepreciable assets. This means that the division has invested $76.0 million in assets with a salvage value of $45.60 million. Annual operating cash flows are $14.0 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. 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 1 2 3 4 Replacement Cost $76,000,000 x 1.1 = $83,600,000 $83,600,000 x 1.1 = $91,960,000 Etc. Depreciation is as follows. Year 1 2 3 4 For the Year $ 8,360,000 9,196,000 0,115,600 11,127,160 Annual Cash Flow $14,000,000 x 1.1 = $15,400,000 $15,400,000 x 1.1 = $16,940,000 Etc. "Accumulated" $8,360,000 (= 10% x $83,600,000) 18,392,000 (= 208 x 91,960,000) 30,346,800 44,508,640 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. & b. Compute ROI using historical cost, net book value and gross book value. c. & d. Compute ROI using current cost, net book value and gross book value.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 18P
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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