Question - A division is considering the acquistition of a new asset that will cost $720,000 and have a cash flow of $252,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes.
a. What is the ROI for each year of the asset's life if the division uses beginning-of-year asset balances and net book value for the computation?
b. What is the residual income each year if the cost of capital is 15 percent?