The following data pertain to Hercules Health Club€™s operations for the most recent year.

Required:
a. Calculate the ROI for Hercules. Use operating income and net book value of assets as the measures for income and investment respectively.
b. Compute the residual income for Hercules, using 14% as the required rate of return.
c. Compute the economic value added (EVA) for Hercules, making sure to separately show the calculation for weighted average cost of capital.
d. What factors might explain the unusually high ROI for Hercules?
e. Suppose Tom and Lynda identify a project that has a 20% ROI. Will they choose to invest in the project? Will your answer differ if, instead of being a family-owned business, Hercules was a branch in a network of gyms? What factors are central to yourargument?

Transcribed Image Text:

Division A Division B Revenues $12,500,000 Direct material costs $2,500,000 $1,800,0 $2,000,0001,500,000 Direct labor Variable overhead Fixed overhead Total $375,000 $1,600,000 $1,200,000 $500,000 $6,600,000 4,875,000 * Does not include the cost of transfer from Division A