Exercise 10-20

Isabelle Abiassi operates a popular summer camp for elementary school children. Projections for the current year are as follows:

Sales revenue		$8,580,000
Operating income		$762,250
Average assets		$4,336,000

The camps weighted-average cost of capital is 11%, and Isabelle requires that all new investments generate a return on investment of at least 16%. The camps current tax rate is 25%. At last weeks 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 boards president presented Isabelle with the following list of three potential investments to improve the camp facilities.

		Playground			Swimming Pool			Gym
Incremental operating income		$ 4,384			$ 6,240			$ 3,002
Average total assets		27,400			41,600			15,800

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		$			$			$

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Which of the three projects do you recommend Isabelle undertake?