The Newburg Flyers operate a major sports franchise from a building in downtown Newburg.
The building was built in 1940 at a cost of $5 million and is fully depreciated so that it is
shown on the company's balance sheet at a nominal value of $1.
The land on which the building was built in 1940 was purchased in 1935 for $10,000 and is
valued at this amount for balance sheet purposes. The franchise, which is the company's
only other major investment, cost $100,000 in 1940 . Following GAAP at the time of the purchase,
the franchise cost has now been fully amortized.
The current assessed value of the building is $200,000. The assessed value of the land, which
is located in a prime urban area, is $20 million and reflects the net value of the property
if the current building is demolished and replaced with an office and shopping complex. The
current value of the franchise, assuming that the league owners would approve a franchise
sale, is $50 million.
a) Ignoring taxes in this calculation, if the team earns an income of approximately $3
million per year, what is the return on investment using the following as the measure of
the investment? Enter ROIs as percentages, no decimals.
i) net book value
%
ii) historical cost
%
b) Ignoring taxes in this calculation and assuming that the organization's cost of capital is 15%,
if the team team earns approximately $3 million per year, what is the residual income using
the following as the measure of the investment? Round answer to the nearest dollar.
i) net book value? $
ii) historical cost? $
The Newburg Flyers operate a major sports franchise from a building in downtown Newburg The building was built in 1940 at a cost of $5 million and is fully depreciated so that it is shown on the company's balance sheet at a nominal value of $1.
The land on which the building was built in 1940 was purchased in 1935 for $10,000 and is valued at this amount for balance sheet purposes. The franchise, which is the company's only other major investment, cost $100,000 in 1940. Following GAAP at the time of the purchase
the franchise cost has now been fully amortized.
The current assessed value of the building is $2o0,000. The assessed value of the land, which is located in a prime urban area, is $20 million and reflects the net value of the property if the current building is demolished and replaced with an office and shopping complex. The current value of the franchise, assuming that the league owners would approve a franchise sale, is $50 million.
a) Ignoring taxes in this calculation, if the team earns an income of approximately $3 million per year, what is the return on investment using the following as the measure of the investment? Enter Rols as percentages, no decimals.
i) net book value
0
K
ii) historical cost 59
%
b) Ignoring taxes in this calculation and assuming that the organization's cost of capital is 15% if the team team earns approximately $3 million per year, what is the residual income using the following as the measure of the investment? Round answer to the nearest dollar.
i) net book value?$
x
ii) historical cost? $
x
