Brian Lochte operates a popular water park.Projections for the current year are as follows:
Sales revenue $8,000,000
Operating income $700,000
Average total assets $4,000,000
The park's weighted-average cost of capital is 10%,and Brian requires that all new investments generate a return on investment of at least 13%.
At last week's board meeting,Brian told the board that he had up to $50,000 to invest in new facilities at the Park and asked them to recommend some projects.Today the board's president presented Brian with the following list of three potential investments to improve the park facilities.
Wading Pool Diving Pool Hot Tub
Incremental operating income $ 3,250 $ 4,800 $ 2,700
Average total assets 25,000 45,000 16,000
Required
a.Calculate the residual income and economic value added for each of the three projects.
b.Which of the three projects do you recommend Brian undertake? Why?

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The Answer of Brian Lochte operates a popular water park.Projections for the current year are as follows:
Sales revenue $8,000,000
Operating income $700,000
Average total assets $4,000,000
The park's weighted-average cost of capital is 10%,and Brian requires that all new investments generate a return on investment of at least 13%.
At last week's board meeting,Brian told the board that he had up to $50,000 to invest in new facilities at the Park and asked them to recommend some projects.Today the board's president presented Brian with the following list of three potential investments to improve the park facilities.
Wading Pool Diving Pool Hot Tub
Incremental operating income $ 3,250 $ 4,800 $ 2,700
Average total assets 25,000 45,000 16,000
Required
a.Calculate the residual income and economic value added for each of the three projects.
b.Which of the three projects do you recommend Brian undertake? Why?

Brian Lochte Operates a Popular Water Park