Brian Lochte Operates a Popular Water Park

question 110

Essay

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

The camp'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 camp facilities.


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?

---

Definitions:

Surplus

is an economic situation in which the quantity of a good supplied exceeds the quantity demanded at the current price, often leading to a decrease in prices.

Supply Determined

Refers to market situations where the quantity of products available in the market is primarily dictated by the supply side factors such as production capacity and inventory levels rather than by consumer demand.

Price Rationing

The process of distributing goods and services among consumers by setting a price level that balances demand with supply.

Allocated

Distributed or assigned resources, time, or funds to specific projects, tasks, or purposes.