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Text Book : Accounting for Decision Making and Control (9th Edition) Case 5-4

New Auntie ww The Pricing 227 228 cast of expansion nor depreciation on expanding her inn is charged to her operating statement. Given the facts provided so far, what decision do you expect her to make regarding building the $10 million addition Explain why. Adams prepares the following report for Judson to justify the expansion project: ROYAL RESORT AND CASINO EVA by Division Millions $) Entertainment Hotel Goming Toral $ 5 Adjuster accountine profits Invested Capital Weighted average cost of capital 5.40 S 10 $120 156 SK S60 15% $ 45 S70 15% Ner Cash 15% Disc Pactar Par Ble of Cash Flow Year ( M OR) EVA S(1) SB S21 S12 SI10.0) S[10.00) 19 1.9 1.15 1.000 0.802 0.797 0.712 0.636 0.567 0.507 0,452 0404 0.361 0.322 Based on an analysis of similar companies, it is determined that each division has the same weighted- average cost of capital of 15 percent. Across town from RRC is a city lock with three wparate businesses: Big Horseshoe Slots & Casino, Nell's Lounge and Grill, and Sunnyside Motel. These businesses serve a less affluent clientele. 1.02 0.91 081 18 0.73 Required 061 1.7 035 Nel present value $0.42 4. Why does RRC operate as a single firm, whereas Big Horseshoe Slots. Nell's Lounge and Grill, and Sunnyside Motel operate as three separate firms? Describe some of the interdependencies that are likely to exist across RRC's three divisions c. Describe some of the internal axministrative devices, accounting-based measures, and for organizational structures that senior managers at RRC can use to control the interdependencies that you described in part(). d. Critically evaluate each of the solutions" you proposed in parte). Judson realizes that Adam's procted cash flows are most likely optimistic, but she does not know how optimistic or even whether or not the project is a positive nel present value project. She decides to change Adams performance measure used in computing her bonus. Adams's compensation will be based on residual income (EVA), Jucionalno changes the accounting system to track asset expansion and depreciation on the expansion Adams's profits from operations will now be charged for straight-line depreciation of the cxpansion using a 10-year life assume a zero salvage value). Calculate Adams's expected residual income from the expansion for each of the next 10 years. Based on your calculations in (b), will Adams propose the expansion project? Explain why Instead of usine residual income as Adam's performance measure in ). Judson uses her cash flows from operations less straight-line depreciation. Will Adams seek to undertake the expansion? Explain why. e Reconcile any differences in your answers for (c) and (d). Case 5-4: Royal Resort and Casino Royal Resort and Crino (RRC), a publicly tracked company, colors to wluent customers seeking plush surroundings, high-quality food and entertainment, and all the glitz associated with the best resorts and casinos, RRC consists of three divisions: hotel, amine, wwertertainment. The hotel division manage the reservation system and lodging operation Gaming consists of operations, security, and junkets. Junkets offers complimentary air fare and lodging and entertainment at RRC for customers known to wager large sumis. The entament division consists of restaurants, lounges.catering, and shows. It boks kounge shows and top name entertainment in the theater. Although many of those peo ple attending the shows and eating in the restaurants stay at RRC.customers staying at other lovels and Casinos in the area also frequent RRC's shows, restaurants, and gaming operations. The following table disaggregates RRC's total EVA of 512 million into an EVA for each division: New Auntie ww The Pricing 227 228 cast of expansion nor depreciation on expanding her inn is charged to her operating statement. Given the facts provided so far, what decision do you expect her to make regarding building the $10 million addition Explain why. Adams prepares the following report for Judson to justify the expansion project: ROYAL RESORT AND CASINO EVA by Division Millions $) Entertainment Hotel Goming Toral $ 5 Adjuster accountine profits Invested Capital Weighted average cost of capital 5.40 S 10 $120 156 SK S60 15% $ 45 S70 15% Ner Cash 15% Disc Pactar Par Ble of Cash Flow Year ( M OR) EVA S(1) SB S21 S12 SI10.0) S[10.00) 19 1.9 1.15 1.000 0.802 0.797 0.712 0.636 0.567 0.507 0,452 0404 0.361 0.322 Based on an analysis of similar companies, it is determined that each division has the same weighted- average cost of capital of 15 percent. Across town from RRC is a city lock with three wparate businesses: Big Horseshoe Slots & Casino, Nell's Lounge and Grill, and Sunnyside Motel. These businesses serve a less affluent clientele. 1.02 0.91 081 18 0.73 Required 061 1.7 035 Nel present value $0.42 4. Why does RRC operate as a single firm, whereas Big Horseshoe Slots. Nell's Lounge and Grill, and Sunnyside Motel operate as three separate firms? Describe some of the interdependencies that are likely to exist across RRC's three divisions c. Describe some of the internal axministrative devices, accounting-based measures, and for organizational structures that senior managers at RRC can use to control the interdependencies that you described in part(). d. Critically evaluate each of the solutions" you proposed in parte). Judson realizes that Adam's procted cash flows are most likely optimistic, but she does not know how optimistic or even whether or not the project is a positive nel present value project. She decides to change Adams performance measure used in computing her bonus. Adams's compensation will be based on residual income (EVA), Jucionalno changes the accounting system to track asset expansion and depreciation on the expansion Adams's profits from operations will now be charged for straight-line depreciation of the cxpansion using a 10-year life assume a zero salvage value). Calculate Adams's expected residual income from the expansion for each of the next 10 years. Based on your calculations in (b), will Adams propose the expansion project? Explain why Instead of usine residual income as Adam's performance measure in ). Judson uses her cash flows from operations less straight-line depreciation. Will Adams seek to undertake the expansion? Explain why. e Reconcile any differences in your answers for (c) and (d). Case 5-4: Royal Resort and Casino Royal Resort and Crino (RRC), a publicly tracked company, colors to wluent customers seeking plush surroundings, high-quality food and entertainment, and all the glitz associated with the best resorts and casinos, RRC consists of three divisions: hotel, amine, wwertertainment. The hotel division manage the reservation system and lodging operation Gaming consists of operations, security, and junkets. Junkets offers complimentary air fare and lodging and entertainment at RRC for customers known to wager large sumis. The entament division consists of restaurants, lounges.catering, and shows. It boks kounge shows and top name entertainment in the theater. Although many of those peo ple attending the shows and eating in the restaurants stay at RRC.customers staying at other lovels and Casinos in the area also frequent RRC's shows, restaurants, and gaming operations. The following table disaggregates RRC's total EVA of 512 million into an EVA for each division

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