Reference no: EM133032230

Question - The Ste. Marie Division of Pacific Media Corporation just started operations. It purchased depreciable assets costing $125 million and having a four-year expected life, after which the assets can be salvaged for $ 25 million. In addition, the division has $125 million in assets that are not depreciable. After four years, the division will have $125 million available from these nondepreciable assets. This means that the division has invested $ 250 million in assets with a salvage value of $150 million. Annual depreciation is $ 25 million. Annual operating cash flows are $68 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. 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, I using gross book value for each year.