Calculate the return on investment, residual income, and economic value added fo
ID: 2466035 • Letter: C
Question
Calculate the return on investment, residual income, and economic value added for each of the three projects. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round Economic Value Added answer to 2 decimal places, e.g. 15.25 & all other answers to 0 decimal places, e.g.15 or 15%.)
Isabelle Abiassi operates a popular summer camp for elementary school children. Projections for the current year are as follows:Sales revenue $8,580,000 Operating income $762,250 Average assets $4,336,000
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 16%. 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 $ 4,384 $ 6,240 $ 3,002 Average total assets 27,400 41,600 15,800
Calculate the return on investment, residual income, and economic value added for each of the three projects. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round Economic Value Added answer to 2 decimal places, e.g. 15.25 & all other answers to 0 decimal places, e.g.15 or 15%.)
Playground Pool Gym Return on Investment % % % Residual Income $ $ $ Economic Value Added $ $ $Explanation / Answer
Answer:
ROI=incremental operating income/Average total asset
Residual income=Incremental operating income-(average Assets*rquired return)
EVA=NOPAT-cost of capital*capital
Particulars Playground Pool Gym ROI 16.00% 15.00% 19.00% Residual income 0 -416 474 EVA -2212 -820 -3248.5Related Questions
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