Brian Lochte operates a popular water park. Projections for the current year are as follows:
| 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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