Compute residual income using gross book value for each year

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Question - The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $85 million and having a four-year expected life, after which the assets can be salvaged for $17 million. In addition, the division has $85 million in assets that are not depreciable. After four years, the division will have $85 million available from these non depreciable assets. This means that the division has invested $170 million in assets with a salvage value of $102 million. Annual depreciation is $17 million. Annual operating cash flows are $44 million. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the company uses a 12 percent cost of capital.

Required -

a. Compute residual income, using net book value for each year.

b. Compute residual income using gross book value for each year.

Reference no: EM133061461

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