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 1994. The Phoenix spa opened in 2007, and the Carmel spa opened in 2016. 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 2020 are shown below:

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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1 2 Home Insert Revenues Variable costs Page Layout A 3 4 Fixed costs 5 Operating income 6 Interest costs on long-term debt at 8% 7 Income before taxes 8 Net income after 35% taxes 9 10 Net book value at 2020 year-end: 11 Current assets 12 Long-term assets 13 Total assets 14 15 Current liabilities 16 Long-term debt 17 Stockholders' equity 18 19 20 Market value of debt Total liabilities and stockholders' equity Formulas Data B Key West Phoenix $4,100,000 $4,380,000 1,600,000 1,630,000 1,280,000 1,560,000 1,220,000 368,000 852,000 553,800 $1,280,000 4.875.000 6,155,000 330,000 4,600,000 1,225,000 6,155,000 Review View 21 Market value of equity 22 Cost of equity capital 23 Required rate of return 24 Accumulated depreciation on long-term assets $2,200,000 1,190,000 416,000 774,000 503,100 $ 850,000 5,462,000 6,312,000 265,000 5,200,000 847,000 6,312,000 D Carmel $3,230,000 955,000 980,000 1,295,000 440,000 855,000 555,750 $ 600,000 6,835,000 7,435,000 84,000 5,500,000 1,851,000 7,435,000 E Total $1,510,000 $ 220,000 $11,710,000 4,185,000 3,820,000 3,705,000 1,224,000 2,481,000 1,612,650 $ 2,730,000 17.172,000 19,902,000 $4,600,000 $5,200,000 $5,500,000 $15,300,000 2,400,000 2,660,000 2,590,000 7,650,000 679,000 15,300,000 3,923,000 19,902,000 14% 11%