Collaborative Learning Problem $23-37$ RI$,$ EVA, Measurement alternatives, Goal congruence. Renewal Resorts, Inc., operates health spas in Ft$.$ Meyers, Florida, Scottsdale, Arizona, and Monterey, California. The Ft$.$ Meyers spa was the company$$s first, opened in $1986.$ The Scottsdale spa opened in $1999,$ and the Monterey spa opened in $2008.$ Renewal Resorts has previously evaluated divisions based on residual income $($RI$),$ but the company is considering changing to an economic value added $($EVA$)$ approach. All spas are assumed to face similar risks. Data for $2012$ follow: $123$ A Revenues Variable costs Ft$.$ Meyers Spa Scottsdale Spa B C Monterey Spa Total $45$ Fixed costs Operating income $67$ Interest costs on long$-$term debt at $8\%5$ Income before taxes at $35\%6$ Net income $1011$ Long$-$term assets Total assets $1213$ Current liabilities Long$-$term debt $14$ Stockholders$$ equity $89$ Net book value at $2012$ year$-$end: Current assets $1718$ Market value of debt Market value of equity $1920$ Cost of equity capital Required rate of return $21$ Accumulated depreciation on long$-$term assets $1516$ Total liabilities and stockholders$$ equity $$4,380,0001,630,0001,560,0001,190,000416,000774,000503,1005,462,0006,312,000265,0005,200,000847,000$ $ $850,000$ $$5,200,0002,660,0001,510,0006,312,000$ $$4,100,0001,600,0001,280,0001,220,000368,000852,000553,8004,875,0006,155,000330,0004,600,0001,225,000$ $$1,280,000$ $$4,600,0002,400,0002,200,0006,155,000$ $$11,710,0004,185,0003,820,0003,705,0001,224,000$ $ $2,730,0002,481,0001,612,65017,172,00019,902,000679,00015,300,0003,923,000$ $$15,300,0007,650,00017\%11\%19,902,000$ $$3,230,000955,000980,0001,295,000440,000855,000555,7506,835,0007,435,00084,0005,500,0001,851,000$ $ $600,000$ $$5,500,0002,590,000220,0007,435,000$ D E 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 Ft$.$ Meyers 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 Ft$.$ Meyers spa? Based on RI$,$ would the Ft$.$ Meyers 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 is goal congruence affected by the selection of asset measurement method?