E5.8. Creating Earnings and Valuing Created Earnings (Medium) The prototype one-period project at the beginning of the chapter was booked at its historical cost of $400. Suppose, instead, that the accountant wrote down the investment to $360 on the balance sheet at the beginning of the period. See the investment as consisting of 5360 of plant (booked to the balance sheet) and $40 advertising (which cannot be booked to the bal- ance sheet under GAAP). Revenues of $440 are expected from the project and the required return is 10 percent. a Forecast earnings from this project for the year.

b. Forecast the rate of return on the book value of this investment and also the residual eamings.

c. Value the investment.