Renewal Resorts, Inc., operates health spas in Key West, Florida; Phoenix, Arizona; and Carmel, California. The Key West spa was the company’s first and opened in 1986. The Phoenix spa opened in 1999, and the Carmel spa opened in 2008. Renewal Resorts has previously evaluated divisions based on RI, but the company is considering changing to an EVA approach. All spas are assumed to face similar risks. Data for 2012 are:

Required
1. Calculate RI for each of the spas based on operating income and using total assets as the measure of investment. Suppose that the Key West spa is considering adding a new group of saunas from Finland that will cost $ 225,000. The saunas are expected to bring in operating income of $ 22,000. What effect would this project have on the RI of the Key West spa? Based on RI, would the Key West manager accept or reject this project? Why? Without resorting to calculations, would the other managers accept or reject the project? Why?
2. Why might Renewal Resorts want to use EVA instead of RI for evaluating the performance of the three spas?
3. Refer back to the original data. Calculate the WACC for Renewal Resorts.
4. Refer back to the original data. Calculate EVA for each of the spas, using net book value of long- term assets. Calculate EVA again, this time using gross book value of long- term assets. Comment on the differences between the two methods.
5. How does the selection of asset measurement method affect goalcongruence?

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Key West Spa Phoenix Spa Carmel Spa Total 2 Revenues 3 Variable costs 4 Fixed costs 5 Operating income 6 | Interest costs on long-term debt at 8% 5 | Income before taxes at 35% 6 Net income $4,100,000 $4,380,000 $3,230,000 $11,710,000 4,185,000 3,820,000 3,705,000 1,224,000 2,481,000 1,612,650 1,600,000 1,280,000 1,220,000 368,000 852,000 553,800 1,630,000 1,560,000 1.190,000 416,000 774,000 503,100 955,000 980,000 1,295,000 440,000 855,000 555,750 8 Net book value at 2012 year-end 9 Current assets $1,280,000 850,000 600,0002,730,000 6,835,000 17,172,000 19,902,000 679,000 15,300,000 3,923,000 7,435,000 19,902,000 10 Long-term assets 4,875,000 6,155,000 330,000 4,600,000 1,225,000 6,155,000 5,462,000 6,312,000 265,000 5,200,000 847,000 6,312,000 7,435,000 11 Total assets 12 Current liabilities 84,000 5,500,000 1,851,000 13 Long-term debt 14 Stockholders' equity 15 Total liabilities and stockholders' equity 16 17 Market value of debt 18 Market value of equity 19 Cost of equity capital 20 Required rate of return 21 Accumulated depreciation on long-term assets 2,220,000 1,510000220,000 $4,600,000 $5,200,000 $5,500,000 $15,300,000 7,650,000 14% 11% 2,40000 266000 2.590,00 2,590,000