The Boise Flyers operate a major sports franchise from a building in downtown Bo
ID: 2575258 • Letter: T
Question
The Boise Flyers operate a major sports franchise from a building in downtown Boise. The building was built in 1940 at a cost of $7,380,500 and is fully depreciated so that it is shown on the company's balance sheet at a nominal value of 51 e nd on which the building wasb in 1940 was purchased in 1935 for $15,000 and is valued at this amount for balance sheet purposes. The franchise, which is the company's only other major investment, cost 105,000 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 $300,000. The assessed value of the land, which is located in a prime urban area, is $30,000,000 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 $74,000,000 Requirements (a) Ignoring taxes in this calculation, if the team eams an income of approximately $4,575,305 per year, what is the return on investment using net book value and historical cost as the measures of investment? (b) Ignoring taxes in this calculation and assuming that the organization's cost of capital is 16%, if the team earns approximately $4,575,305 per year, what is the residual income using net book value and historical cost as the measures of investment? Requirement (a) Ignoring taxes in this calculation, if the team earns an income of approximately $4,575,305 per year, what is the return on investment using net book value and historical cost as the measures of investment? Determine the formula, then calculate the return on investment using net book value and historical cost as the measures of investment (Round the percentages to the nearest whole percent) Return on investment Historical cost 1%Explanation / Answer
Requirement 'A'
1 ) Net book value return on investment
Under this method, Return on investment is calculated as per net book value shown in balance sheet and not on the value at which the building was purchase.
Return on investment(formula)=Income/Net book value * 100
Values :- Income = $4575305
Net book value = $1 + $15000 + $0 = $15001 (Value of Building + land + franchise)
Note - Franchise is fully amortised.
2) Historical Return on investment
Under this method, purchase value is considered for return calculation. Purchase values are historic cost of any asset.
Return on investment (formula)=Income/Historical cost * 100
Values : Income = $4575305
Historical cost = $7380500 + $15000 + $105000 = $7500500 (Historical cost of Building + Land + Franchise)
Requirement 'B'
1) Residual income using Net book value return on investment
Residual income is the net income after deducting the organisational cost of capital from Income
Residual Income = Income - Required return on investment
Values : Income = $4575305
Required return on investnent = (cost of capital * Net book value) = ($15001 * 16% = $2400.16)
2) Residul income using Historical return on investment
Residul Income = Income - required return on investment
Values = Income = $4575305
Required return on investement = $7500500 * 16% = $1200080
Return on investment(formula)=Income/Net book value * 100
Values :- Income = $4575305
Net book value = $1 + $15000 + $0 = $15001 (Value of Building + land + franchise)
Note - Franchise is fully amortised.
Return on investment = $4575305/$15001 * 100 = 30500%Related Questions
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