Please please help!! Isabelle Abiassi operates a popular summer camp for element
ID: 2595290 • Letter: P
Question
Please please help!!
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. Swimming Playground Pool $4,466 2,754 40,600 Gym Incremental operating income Average total assets 3,766 26,900 15,300 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 0 decimal places, e.g. 15 or 15% Playground Pool Gym Return on Investment Residual Income Economic Value Added $ LINK TO TEXT LINK TO TEXT LINK TO VIDEO LINK TO VIDEO Which of the three projects do you recommend Isabelle undertake?Explanation / Answer
Return on Investment
= (Operating Income/Average Assets) * 100
Playground = (3,766 / 26,900) *100 = 14%
Swimming pool = (4,466 / 40,600) * 100 = 11%
Gym = (2,754 / 15,300) * 100 = 18%
Residual Income
= Operating Income – (Average Assets*Minimum rate of Return)
Playground = 3,766 – (26,900*14%) = 0
Swimming pool = 4,466 – (40,600*14%) = (1,218)
Gym = 2,754 – (15,300*14%) = 612
Economic Value Added
= Net profit after tax – (WACC * Average Assets)
Playground = (3,766 * 75%) – (26,900*9%) = 403.5
Swimming pool = (4,466 * 75%) – (40,600*9%) = (304.5)
Gym = (2,754 * 75%) – (15,300*9%) = 688.5
Conclusion
The company should select Playground and Gym both as company can invest $50,000 and Combine average Investment in both projects is less than $50,000 so company can invest in both because they both have ROI more than 14% and their Residual Income are also positive and EAV is also positive.