Question

Isabelle Abiassi operates a popular summer camp for elementary school children. Projections for the current year are as follows:

Sales revenue		$7,800,000
Operating income		$687,500
Average assets		$3,920,000

The camp’s weighted-average cost of capital is 11%, and Isabelle requires that all new investments generate a return on investment of at least 15%. The camp’s current tax rate is 25%.

At last week’s advisory board meeting, Isabelle told the board that she had up to $50,000 to invest in new facilities at the camp and asked them to recommend some projects. Today the board’s president presented Isabelle with the following list of three potential investments to improve the camp facilities.

	Playground			Swimming Pool			Gym
Incremental operating income		$ 3,915			$ 5,460			$ 2,465
Average total assets		26,100			39,000			14,500

Calculate the return on investment, residual income, and economic value added for each of the three projects.

Playground			Pool			Gym

Return on Investment		Enter percentages rounded to 0 decimal placesEnter percentages rounded to 0 decimal placesEnter percentages rounded to 0 decimal places	%		Enter percentages rounded to 0 decimal placesEnter percentages rounded to 0 decimal placesEnter percentages rounded to 0 decimal places	%		Enter percentages rounded to 0 decimal placesEnter percentages rounded to 0 decimal placesEnter percentages rounded to 0 decimal places	%
Residual Income		$Enter a dollar amount rounded to 0 decimal places Enter a dollar amount rounded to 0 decimal placesEnter a dollar amount rounded to 0 decimal places			$Enter a dollar amount rounded to 0 decimal places Enter a dollar amount rounded to 0 decimal placesEnter a dollar amount rounded to 0 decimal places			$Enter a dollar amount rounded to 0 decimal places Enter a dollar amount rounded to 0 decimal placesEnter a dollar amount rounded to 0 decimal places
Economic Value Added

Playground			Pool			Gym

Answer 1