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Item6

Problem 12-24 Accounting measures of performance

The table given below shows how, on average, the market value of a Boeing 737 has varied with its age and the cash flow needed in each year to provide a 12% return. (For example, if you bought a 737 for $19.99 million at the start of year 1 and sold it a year later, your total profit would be 18.14 + 4.25 19.99 = $2.40 million, 12% of the purchase cost.) Assume airlines write off their aircraft straight-line over 15 years to a salvage value equal to 15% of the original cost.

Start of Year	Market Value	Cash Flow
1	19.99
2	18.14	4.25
3	17.09	3.23
4	15.93	3.21
5	15.19	2.65
6	14.24	2.77
7	13.66	2.29
8	12.83	2.47
9	12.35	2.02
10	11.61	2.22
11	11.21	1.79
12	10.54	2.02
13	10.21	1.59
14	9.59	1.85
15	9.31	1.43
16	8.74	1.69

a. Calculate economic depreciation, book depreciation, economic return, and book return for each year of the planes life. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions except for percentage values. Round your percentage answers to 1 decimal place and other answers to 2 decimal places.)

b-1. Suppose an airline invested in a fixed number of Boeing 737s each year. Calculate the steady-state book rate of return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b-2. Would steady-state book return overstate or understate true return? multiple choice

Understate

Overstate