Problem
Six Flags Theme Parks, Inc., operates theme parks in the United States, Mexico, and Europe. One of its first theme parks, Six Flags over Georgia, was built in the 1960s in Atlanta on a large tract of land that has appreciated enormously over the years. Although most of the rides and other attractions have a fairly short life, some of the major buildings that are still in use on the property have been fully deprecated since they were built. Assume the Six Flags over Georgia operates as an investment center with total assets that have a book value of $160 million and current liabilities of $20 million. Assume also that in 2014 this particular theme park had sales of $120 million and pretax division income of $40 million. The replacement cost of all the assets in this park is estimated to be $250 million. The company has a 35 percent tax rate and a target return of 10% and a cost capital of 8%
a) Calculate the ROI, residual income, and EVA for Six Flags over Georgia using book value as the valuation basis for the investment after base.
b) Repeat requirement (a) using replacement cost as the investment center asset value.
c) Which valuation, accounting book value or replacement cost do you think the company uses to evaluate the managers of its various theme park? Discuss.