Question
David Davis operates a popular water park. Projections for the current year are as follows: Sales revenue $8,105,000 Operating income 715,000 Average total assets 4,105,000
David Davis operates a popular water park. Projections for the current year are as follows: Sales revenue $8,105,000 Operating income 715,000 Average total assets 4,105,000 The parks weighted-average cost of capital is 10%, and David requires that all new investments generate a return on investment of at least 13%. At last weeks board meeting, David told the board that he had up to $56,000 to invest in new facilities at the Park and asked them to recommend some projects. Today, the boards president presented David with the following list of three potential investments to improve the park facilities. Wading Pool Diving Pool Hot Tub Incremental operating income $ 4,030 $ 5,400 $ 3,500 Average total assets 31,000 51,000 22,000
a. Calculate the residual income and economic value added for each of the three projects.
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