Return on investment and economic value added The Newburg Flyers oper¬

ate a major sports franchise from a building in downtown Newburg. The build¬ ing 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 upon 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.

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 fran¬ chise, assuming that the league owners would approve a franchise sale, is $50,000,000.

REQUIRED

(a) If the team earns approximately $3,000,000 per year, what is the return on investment? (Ignore taxes in this calculation.)

(b) If the team earns approximately $3,000,000 per year, what is the eco¬ nomic value added? Assume that the organization's cost of capital is 15%. (Ignore taxes in this calculation.)(LO 1)