The Caribbean Division of Mega-Entertainment Corporation just started operations
ID: 2487763 • Letter: T
Question
The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $33.0 million and having a four-year expected life, after which the assets can be salvaged for S6.6 million. In addition, the division has $33.0 million in assets that are not depreciable. After four years, the division will have $33.0 million available from these non-depreciable assets. This means that the division has invested $66 million in assets with a salvage value of $39.6 million. Annual depreciation is $6.6 million. Annual operating cash flows are $15.6 million. In computing ROL 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: Compute ROI, using net book value and gross book value for each year. (Do not round intermediate calculations. Round your answers to 1 decimal place.)Explanation / Answer
Mega Entertainment Corporation All Amounts in $ million Depreciation per year for the assets $ 33 million - $ 6.6 million = $ 26.4 million / 4 years = $ 6.6 million Depreciation Schedule Year Gross Depreciation Net Book Book Value Value 1 26.4 6.6 19.8 2 19.8 6.6 13.2 3 13.2 6.6 6.6 4 6.6 6.6 0 Income per year Annual Operating Cash Flows $ 15.6 million Less : Depreciation $ 6.6 million Net Income $ 9 million ROI based on Net Book Value and Gross Book Value per year Year ROI based on ROI based on Net Book Value Gross Book Value 1 45.5% 34.1% 2 68.2% 45.5% 3 136.4% 68.2% 4 N.A 136.4%