The camp's weighted-average cost of capital is 9%, and Isabelle requires that all new investments generate a return on investment of at least 14%. The camp's current tax rate is 25%. At last week's advisory board meeting, Isabelle told the board that she had up to $50,000 to invest in new facilities at the camp and asked them to recommend some projects. Today the board's president presented Isabelle with the following list of three potential investments to improve the camp facilities. Playground Swimming PoolGymIncremental operating income $3,500$ 4,800 2,700Average total assets 25,000 40,000 15,000 Required (a) Calculate the return on investment, residual income, and economic value added for each of the three projects. (b) Which of the three projects do you recommend Isabelle undertake? Why?
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