ri eva measurement alternatives goal congruence renewal reso 270010

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:



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 measurementmethod?