Reference no: EM131818205

Question - Return on investment and residual income The Newburg Flyers operate a major sports franchise from a building in downtown Newburg. The building was built in 1940 at a cost of $5,000,000 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 $20,000,000 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 $50,000,000.

Required: Ignoring taxes in this calculation and assuming that the organization's cost of capital is 15%, if the team earns approximately $3,000,000 per year, what is the residual income using net book value and historical cost as the measures of investment?