The Butyl Division of the Swiss Corporation Just Started Operations

Essay

The Butyl Division of the Swiss Corporation just started operations. It purchased depreciable assets costing $2,500,000 with an expected life of five years, after which the assets can be salvaged for $400,000. Depreciation is computed for the financial statements on a straight-line basis, using the salvage value. Annual operating cash flows are $1,300,000 for year 1. Assume that all cash flows and asset prices increase by 12.5% per year.
Required:
a. Compute the division's ROI for the first three years, using end of the year asset values, current costs, and net book values.
b. Compute the division's ROI for the first three years, using end of the year asset values, current costs, and gross book values.