One Division of the Marvin Educational Enterprises Has Depreciable Assets

Multiple Choice

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000. The cash flows from these assets for the past three years have been:
$$\begin{array} { c l l } \text { Year } & { \text { Cash flows } } \\1 & \mathbf { \$ } 1,200,000 \\2 & \$ 1,400,000 \\3 & \$ 1,620,000\end{array}$$
The current (i.e., replacement) costs of these assets were expected to increase 25% each year.
-Marvin used the straight-line depreciation method and the estimated useful life is 10-years with no salvage value. For return on investment (ROI) calculations, Marvin uses end-of-year balances.
What is the residual income for each year, assuming the cost of capital is 15% and Marvin uses historical costs and gross book values to compute residual income?
$\begin{array} { l l l l l l l } & { \text { Year } 1 } & { \text { Year 2 } } & { \text { Year 3 } } \\\end{array}$
A) $\begin{array} { l c c c } & \$ & 200,000 & \$ & 400,000 & \$ & 620,000 \\\end{array}$
B) $\begin{array} { l c c c } & \$ & 200,000 & \$ & 200,000 & \$ & 200,000 \\\end{array}$
C) $\begin{array} { l c c c } & \$ & 250,000 & \$ & 200,000 & \$ & 450,000 \\\end{array}$
D) $\begin{array} { l c c c } & \$ & 250,000 & \$ & 400,000 & \$ & 375,000\end{array}$

A) Option A
B) Option B
C) Option C
D) Option D