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

Answer 1

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.