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:
$$\begin{array} { | c | r | } \hline \text { Year } & \text { Cash flows } \\\hline 1 & \$ 1,200,000 \\\hline 2 & \$ 1,400,000 \\\hline 3 & \$ 1,620,000 \\\hline\end{array}$$ The current (i.e. ,replacement) costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;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 net book values to compute residual income? $$\begin{array} { | l l | c l | } \hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline \text { A. } & \$ 200,000 & \$ 435,000 & \$ 690,000 \\\hline \text { B. } & \$ 260,000 & \$ 520,000 & \$ 800,000 \\\hline \text { C. } & \$ 260,000 & \$ 420,000 & \$ 540,000 \\\hline \text { D. } & \$ 280,000 & \$ 400,000 & \$ 750,000 \\\hline\end{array}$$

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