Biology Forums - Study Force

Brian Lochte operates a popular water park. Projections for the current year are as follows:

Sales revenue

$8,000,000

Operating income

700,000

Average total assets

4,000,000

The park's weighted-average cost of capital is 10%, and Brian requires that all new investments generate a return on investment of at least 13%. At last week's board meeting, Brian told the board that he had up to $50,000 to invest in new facilities at the Park and asked them to recommend some projects. Today the board's president presented Brian with the following list of three potential investments to improve the park facilities.

Wading Pool

Diving Pool

Hot Tub

Incremental operating income

$  3,250

$  4,800

$  2,700

Average total assets

25,000

45,000

16,000

Required:

a.	Calculate the residual income and economic value added for each of the three

projects.

b.	Which of the three projects do you recommend Brian undertake? Why?

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