Exeter Division of Wetherby Labs acquired an asset with a cost of $800,000 and a four-year life.
Question:
Exeter Division of Wetherby Labs acquired an asset with a cost of $800,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows:
The cost of the asset is expected to increase at a rate of 5 percent per year, compounded each year. Performance measures are based on beginning-of-year gross book values for the investment base. Ignore taxes.
Required
a. What is the ROI for each year of the asset’s life, using a historical cost approach?
b. What is the ROI for each year of the asset’s life if both the investment base and depreciation are determined by the current cost of the asset at the start of each year?
Year 1...... 2 3.. 4... Cash Flow $250,000 275,000 290,000 300,000
Step by Step Answer:
a b Year 1 Year 2 Year 3 Year 4 250000 25 ...View the full answer
Related Video
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
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