Refresh Resorts, Inc., operates health spas in Key West, Florida; Phoenix, Arizona; and Carmel, California. The Key West spa was the company's first and opened in 1991. The Phoenix spa opened in 2004, and the Carmel spa opened in 2013. Refresh Resorts has previously evaluated divisions based on RI, but the company is considering changing to an EVA approach. All spas are assumed to face similar risks. Data for 2017 are

Required
1. Calculate RI for each of the spas based on operating income and using total assets as the measure of investment. Suppose that the Key West spa is considering adding a new group of saunas from Finland that will cost $225,000. The saunas are expected to bring in operating income of $22,000. What effect would this project have on the RI of the Key West spa? Based on RI, would the Key West manager accept or reject this project? Without resorting to calculations, would the other managers accept or reject the project? Why?
2. Why might Refresh Resorts want to use EVA instead of RI for evaluating the performance of the three spas?
3. Refer back to the original data. Calculate the WACC for Refresh Resorts.
4. Refer back to the original data. Calculate EVA for each of the spas, using net book value of long-term assets. Calculate EVA again, this time using gross book value of long-term assets. Comment on the differences between the two methods.
5. How does the selection of asset measurement method affect goal congruence?

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Key West Phoenix Carmel Total 2 Revenues 3 Variable costs 4 Fixed costs $4,100,000 $4,380,000$3,230,000 $11,710,000 4,185,000 3,820,000 3,705,000 1,600,000 1,280,000 1,220,000 1,630,000 1,560,000 955,000 980,000 1,190,0001,295,000 416.000440000 855,000 555,750 ncome 6 Interest costs on lo 7 Income before taxes 8 Net income after 35% taxes 9 10 Net book value at 2017 year-end 11 Current assets 12 Long-term assets 13 Total assets -term debt at 8% 852,000 553,800 774,000 503,100 2,481,000 1,612,650 $1,280,000S 850,000 600,000 2,730,000 6,155,000 6,312,000 7,435,000 19,902,000 15 Current liabilities 16 17 |Stockholders'equi 18 Total liabilities and stockholders' equi 19 20 Market value of debt 21 Market value of 22 Cost of equity capital 23 Required rate of return 24 Accumulated depreciation on long-term assets 330,000 265,000 679,000 15,300,000 851 0003,923,000 7,435,000 19,902,000 84,000 4,600,0005,200,000 847,000 term debt 5,500,000 1,225,000 6,155,000 6,312,000 $15,300,000 7,650,000 14% 11% $2,200,000$1,510,000 220,000