The Singer Division of Patio Enterprises currently earns $234 million and has divisional assets of...
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The Singer Division of Patio Enterprises currently earns $234 million and has divisional assets of $195 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $3,375,000 and will have a yearly cash flow of $840,000. The asset will be depreciated using the straight line method over a six-year life and is expected to have no salvage value Divisional performance is measured using Rol with beginning of-year net book values in the denominator. The company's cost of capital is 9 percent. Ignore taxes. The division manager learns that he has the option to lease the asset on a year-to-year lease for $740,000 per year. All depreciation and other tax benefits would accrue to the lesson Required: a. What is the division's residual income before considering the project? b. What is the division's residual income if the asset is purchased? c. What is the division's residual income if the asset is leased? (Enter your answers in dollars, not in millions.) a Residual income 6. Residual income Residual income
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