The Newburg Flyers operate a major sports franchise from a bldg in downtown Newburg. Built in 1940 at a cost of $5,000,000 and is fully depreciated, so that it shows a value of $1 on the balance sheet. the land the bldg is on was purchased in 1935 for $10,000 and is valued at this amount for bal sheet purposes. The franchise itself cost $100,000 in 940.
The current assessed value of the bldg is $200,000.
The assessed value of the land is $20,000,000, and it reflects the net value of the property if the current bldg us demo'd and replaced with an office and shopping complex.
The current value of the franchise-assuming the league owners approve a sale is $50,000,000.
a) Ignoring taxes, if the team earns $3,000,000/year, what is the Return on Investment using net book value and historical cost as the measures of the investment?
b) Ignoring taxes, and assuming the org's cost of capital is 15%, if the team earns $3,000,000/year, what is the residual income using net book value and historical cost as the measures of the investment?
The problem deals with estimating the residual income and return on investment for selected data.