my book has nothing in it on residual income and economic value added. how do yo

Question

my book has nothing in it on residual income and economic value added. how do you figure them out using the given information? Hopefully, you can read this info from my picture. Thank You.

Exercise 10-20 Isabelle Abiassi operates a popular summer camp for school children. Projections for the current year are as follows: Sales revenue $7,440,000 $653,000 Average assets $3.728,000 The camp's weighted-average cost of capital is 8%, and Isabelle 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 o requires that a" new investments generate a return on investment of at least 12%. The camp 's current tax rate is 25%. asked them to recommend some projects. Today the board's president presented Isabelle with the follawing list of three potential investments to improve the camp facilities. Pool Incremental operating income $ 3,060 Average total assets Gym $ 3,402 2.224 800 13.900 25,500 return on investment residual income, and economic value added for each of the three arojects. (Enter negative amounts using either a negative sign preceding the number a g. 45 or e.g (45), Round Economic Valuc Added ansiver to 2 decimal places, eg. 15.25 & all other answers to 0 decimal places, e.g. 15 or 1500.) Pool Return on Investment Residual Income Economic Value Added 18 sl Which of the three projects do you recommend Isabelle undertake? SAVE FOR LATER

Explanation / Answer

Ans.1 Playground Pool Gym Return on investment 12% 9% 16% Residual income 0 -1134 556 Economic value added 255 -472.5 556 *Return on Investment   =   Incremental opearting income / Average total asssets * 100 Playground 3060 / 25500 * 100 12% Pool 3402 / 37800 * 100 9% Gym 2224 / 13900 * 100 16% *Residual income   =   Incremental operating income - (Average total assets * Minimum required ROI ) Playground 3060 - (25500 * 12%) 0 Pool 3402 - (37800 * 12%) -1134 Gym 2224 - (13900 * 12%) 556 *Economic value added = [Incremental operating income * (1-tax rate)] - (average total assets * WACC) Playground [3060 * ( 1 - 0.25)] - (25500 * 0.08) 255 Pool [3402 * ( 1 - 0.25)] - (37800 * 0.08) -472.5 Gym [2224 * ( 1 - 0.25)] - (13900 * 0.08) 556 *WACC = Weighted average cost of capital. Ans.2 Isabelle should undertake the following projects: Playground Gym These projects are acceptable because they have the positive residual income & Economic value added.

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