Problem: S&K Jewelry is formed on December 31, 2000. At that point it has one asset costing $2,487. The asset has a three-year life with no salvage value and is expected to generate cash flows of $1,000 on December 31, it the years 2001, 2002 and 2003. Actual results are the same as planned. Depreciation is the firm’s only expense. All income is to be distributed as dividends on the three dates mentioned. Other information includes:
The price index stands at 100 on December 31, 2000. It goes up to 104 on
January 1, 2002 and 108 on January 1, 2003.
Net realizable value of the asset on December 31 in the years 2001, 2002, and
2003 is $1,500, $600, and $0, respectively.
The firm’s asset IRR is 10%.
You are tasked with producing the income statements for 2001, 2002, and 2003 under:
Historical costing
General price-level adjustment
Exit valuation
Replacement costs
Discounted cash flow