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choco1433 choco1433
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4 months ago
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 assets4,000,000

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 PoolDiving PoolHot 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?
Textbook 
Managerial Accounting

Managerial Accounting


Edition: 4th
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windytodaiwindytodai
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4 months ago
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More solutions for this book are available here
a.
​​Residual IncomeEVA
Wading Pool$3,250 − (13% × $25,000) = $0$3,250 − (10% × $25,000) = $750
Diving Pool$4,800 − (13% × $45,000) = ($1,050)$4,800 − (10% × $45,000) = $300
Hot Tub$2,700 − (13% × $16,000) = $620$2,700 − (10% × $16,000) = $1,100

b.Both the wading pool and the hot tub produce positive residual incomes. The diving
pool does not, so the investment should not be made. Since the total amount of the investments for the wading pool and the hot tub is $41,000, Brian may want to do both projects. If only one project can be completed, the hot tub provides the best return for the park.
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choco1433 Author
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4 months ago
Correct Slight Smile TY
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