Answer:
initial investment = $2,520,000
cash flow for years 1 - 4 = $700,000
ROI = (cash flow - depreciation) / investment
depreciation for year 1-4 using straight-line basis = $2,520,000 / 4 = $630,000
ROI year 1 = (700,000 - 630,000) / 2,520,000 = 70,000 / 2,520,000 = 2.8%
ROI year 1 = 70,000 / 1,890,000 = 3.7%
ROI year 1 = 70,000 / 1,260,000 = 5.6%
ROI year 1 = 70,000 / 630,000 = 11.1%
cost of capital year 1 = $2,520,000 x 8% = $201,600
cost of capital year 2 = $1,890,000 x 8% = $151,200
cost of capital year 3 = $1,260,000 x 8% = $100,800
cost of capital year 4 = $630,000 x 8% = $50,400
residual income = excess income - cost of capital
residual income year 1 = $70,000 - $201,600 = -$131,600
residual income year 2 = $70,000 - $151,200 = -$81,200
residual income year 3 = $70,000 - $100,800 = -$30,800
residual income year 4 = $70,000 - $50,400 = $19,600
year net investment cash flow - dep. ROI residual income
1 $2,520,000 $70,000 2.8% ($131,600)
2 $1,890,000 $70,000 3.7% ($81,200)
3 $1,260,000 $70,000 5.6% ($30,800)
4 $630,000 $70,000 11.1% $19,600
