You are the controller of a chain of dry-cleaning establishments. You are comput

Question

You are the controller of a chain of dry-cleaning establishments. You are computing the return on investment for each outlet. Outlet A, located in a city core, reported a net profit of $160,000.

The land on which Outlet A is located was essentially rural when it was purchased for $120,000.

Since then, the city has expanded, and the land is now located in the population center. Comparable undeveloped land in the immediate area of the outlet is worth $2,400,000. The net book value of the outlet building and equipment is $305,000. The replacement cost of the building and equipment is $1,500,000. If the outlet building, equipment, and land were sold as a going concern, the sale price would be $1,900,000. It would cost $125,000 to demolish the building and clear the property for commercial development.

Requirements:

a)     What is the return on this investment?

b)     How would you decide whether this outlet should continue to be operated, sold as a going concern, or demolished and the land sold?

PS: Please give the formula and little explanation on how you solved it

Explanation / Answer

Answer for a)

Here, it is aassumed that purchase price of land is book value and there if no other investment other than land, machinery and equipment.

Return on investment:net profit/total investment.

=($160000/$(120000+305000))×100=28.24%

Answer for b)

Here,I would say that the outlet must be continued if the management is willing to add it was giving Yield of 28.24% as it seems that the land have great scope for increase in value as there is a price variance of $2280000($2400000-120000).If the management is not willing to continue the business than it is better to sills it as commercial property after demolishing the building as it would yield them $2275000($2400000-$125000) which is good price than $1900000.

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