Question
Water Cool is a manufacturer of recreational water sports equipment. Performance of the kitesurfing division is measured as an investment centre. Following is financial information
Water Cool is a manufacturer of recreational water sports equipment. Performance of the kitesurfing division is measured as an investment centre. Following is financial information for the kitesurfing division.
Average operating assets
$2,000,000
Current liabilities
500,000
Operating income
300,000
Kitesurfing division's required rate of return is 12 per cent, but Water Cool's weighted average cost of capital is 9 per cent, and the tax rate is 30 per cent.
Required
Round your answers to 2 decimal places if needed.
(1) Calculate ROI for the kitesurfing division (1 mark).
(2) Calculate residual income (RI) for the kitesurfing division (1 mark).
(3) Calculate economic value added (EVA) for the kitesurfing division (3 marks).
(4) Suppose the manager of the kitesurfing division identifies a project costing $600,000 that will generate an additional $60,000 in operating profit. Will he choose to invest in the project if ROI is used to measure the performance? Will the CEO of Water Cool choose to invest in the project? Show all calculations to support your conclusion (4 marks).
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