Isabelle Abiassi operates a popular summer camp for elementary school children.
ID: 2408117 • Letter: I
Question
Isabelle Abiassi operates a popular summer camp for elementary school children. Projections for the current year are as follows Sales revenue Operating income $699,000 Average assets$3,984,000 $7,920,000 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. Swimming Incremental operating income Average total assets Playground $3,945 26,300 Pool $5,122 39,400 Gym $ 2,940 14,700 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 o decimal places, e.g. 15 or 15%.) Playground Pool Gym 15% 13% Return on Investment Residual Income Economic Value Added 20 %Explanation / Answer
Play Ground
Swimming Pool
Gym
Return on residual Income
15%
13%
20%
Residual Income
0 (Zero)
- $788 (Negative)
$735
Economic Value Added
$65.75
- $492.50 (Negative)
$588
PLAYGROUND
1.Return on investment
=[ Incremental operating income / Average total assets ] x 100
= [ 3945 / 26300 ] x 100
= 15%
2.Residual Income
= $3945 - [ 26300 x 15% ]
= $3945 – 3945
= 0 (Zero)
3.Economic Value Added
=($3945 x 75%) – ($26300 x 11%)
= $ 2958.75 – 2893
= $65.75
SWIMMING POOL
1.Return on investment
=[ Incremental operating income / Average total assets ] x 100
= [ 5122 / 39400 ] x 100
= 13%
2.Residual Income
= $5122 – [ 39400 x 15% ]
= $5122 – 5910
= - $788 (Negative)
3.Economic Value Added
=($5122 x 75%) – ($39400 x 11%)
= $ 3841.5 – 4334
= - $492.50 (Negative)
GYM
1.Return on investment
= [ Incremental operating income / Average total assets ] x 100
=[ $2940 / 14700 ] x 100
= 20%
2.Residual Income
= $2940 – [ 14700 x 15% ]
= $2940 – 2205
= $735
3.Economic Value Added
= ($2940 x 75%) – ($14700 x 11%)
= $2205 – 1617
= $588
Play Ground
Swimming Pool
Gym
Return on residual Income
15%
13%
20%
Residual Income
0 (Zero)
- $788 (Negative)
$735
Economic Value Added
$65.75
- $492.50 (Negative)
$588
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