Isabelle Abiassi operates a popular summer camp for elementary school children.

Question

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

Sales revenue $8,280,000

Operating income $733,500

Average assets $4,176,000 The camp’s weighted-average cost of capital is 9%, and Isabelle requires that all new investments generate a return on investment of at least 14%. 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 $ 3,766 $ 4,466 $ 2,754 Average total assets 26,900 40,600 15,300

Explanation / Answer

Details Playground Swimming Pool Gym Incremental operating income $3,766 $4,466 $2,754 Tax @ 25% $942 $1,117 $689 Post Tax Income $2,825 $3,350 $2,066 Average total assets 26,900 40,600 15,300 ROI = 11% 8% 14% The investment in Gym has the required return on new investment and can be chosen for new investment project

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