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 $155,000. 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 $280,000. The replacement cost of the building and equipment is $1,600,000. If the outlet? building, equipment, and land were sold as a going? concern, the sale price would be $1,950,000. It would cost $150,000 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? |
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. |
=($155000/$(120000+280000))×100=38.75% |
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 38.75% 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-$150000) which is good price than $2250000. |
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