ROI and economic value added computations. A bank considers acquiring new computer equipment. The computer will cost $160,000 and result in a cash savings of $70,000 per year (excluding depreciation) for each of the five years of the asset's life. It will have no salvage value after five years. Assume straight-line depreciation (depreciation expensed evenly over the life of the asset). The company's tax rate is 15 percent, and there are no current liabilities associated with this investment.
a. What is the ROI for each year of the asset's life if the division uses beginning-of-year net book value asset balances for the computation?
b. What is the economic value added each year if the weighted-average cost of capital is 25 percent?