. Refresh 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 1991. The Phoenix spa opened in 2004, and the Carmel spa opened in 2013. Refresh 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 2017 are: Q.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. HomeInsertPage LayoutFormulasDataReviewViewKey WestPhoenixCarmelTotal2 Revenues3 Variable costs4 Fixed costs5 Operating income6 Interest costs on long-term debt at 8%7 Income before taxes8 Net income after 35% taxes$4,100,0001,600,0001,280,0001,220,000368,000852,000$4,380,0001,630,0001,560,000$3,230,000955,000980,000$11,710,0004,185,0003,820,0003,705,0001,224,0002,481,0001,190,000416,0001,295,000440,000855,000774,000553,800503,100555,7501,612,65010 Net book value at 2017 year-end:11 Current assets12 Long-tem assets13 Total assets$ 850,0005,462,0006,312,000$ 2,730,00017,172,00019,902,000$1,280,0004,875,0006,155,000$ 600,0006,835,0007,435,0001415 Current liabilities16 Long-term debt17 Stockholders' equity18 Total liabilities and stockholders' equity330,0004,600,0001,225,0006,155,000265,0005,200,000847,00084,0005,500,0001,851,0007,435,000679,00015,300,0003,923,00019,902,0006,312,0001920 Market value of debt21 Market value of equity22 Cost of equity capital23 Required rate of return24 Accumulated depreciation on long-temm assets$15,300,0007,650,00014%11%$2,200,000$1,510,000$ 220,000

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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. Refresh 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 1991. The Phoenix spa opened in 2004, and the Carmel spa opened in 2013. Refresh 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 2017 are:

Q.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.

Home
Insert
Page Layout
Formulas
Data
Review
View
Key West
Phoenix
Carmel
Total
2 Revenues
3 Variable costs
4 Fixed costs
5 Operating income
6 Interest costs on long-term debt at 8%
7 Income before taxes
8 Net income after 35% taxes
$4,100,000
1,600,000
1,280,000
1,220,000
368,000
852,000
$4,380,000
1,630,000
1,560,000
$3,230,000
955,000
980,000
$11,710,000
4,185,000
3,820,000
3,705,000
1,224,000
2,481,000
1,190,000
416,000
1,295,000
440,000
855,000
774,000
553,800
503,100
555,750
1,612,650
10 Net book value at 2017 year-end:
11 Current assets
12 Long-tem assets
13 Total assets
$ 850,000
5,462,000
6,312,000
$ 2,730,000
17,172,000
19,902,000
$1,280,000
4,875,000
6,155,000
$ 600,000
6,835,000
7,435,000
14
15 Current liabilities
16 Long-term debt
17 Stockholders' equity
18 Total liabilities and stockholders' equity
330,000
4,600,000
1,225,000
6,155,000
265,000
5,200,000
847,000
84,000
5,500,000
1,851,000
7,435,000
679,000
15,300,000
3,923,000
19,902,000
6,312,000
19
20 Market value of debt
21 Market value of equity
22 Cost of equity capital
23 Required rate of return
24 Accumulated depreciation on long-temm assets
$15,300,000
7,650,000
14%
11%
$2,200,000
$1,510,000
$ 220,000

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Step 1

Following are the computation of EVA for each spa using net book value of long term assets:

Step 2

Following are the computation of EVA for each spa using gross book value of long term assets:

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