The Empire Hotel is a full-service hotel in a large city. Empireis organized into three departments that are treated as investmentcenters. Budget information for the coming year for these threedepartments is shown as follows. The managers of each of thedepartments are evaluated and bonuses are awarded each year basedon ROI.

Empire Hotel
	Hotel Rooms				Restaurants				Health Spa
Average investment	$	8,064,000			$	4,908,000			$	750,000
Sales revenue	$	10,000,000			$	2,000,000			$	600,000
Operating expenses		8,767,000				1,025,000				452,000
Operating earnings	$	1,233,000			$	975,000			$	148,000

Required:

a. Compute the ROI for each department. Use theDuPont method to analyze the return on sales and capitalturnover.

Assume the Health Spa is considering installing new exerciseequipment. Upon investigating, the manager of the division findsthat the equipment would cost $40,000 and that operating earningswould increase by $8,000 per year as a result of the newequipment.

b-1. What would be the ROI of investment in thenew exercise equipment and Health Spa?

b-2. Would the manager of the Health Spa bemotivated to undertake such an investment?

c-1. Compute the residual income for eachdepartment if the minimum required return for the Empire Hotel is17 percent.

c-2. What would be the impact of the investmenton the Health Spa's residual income?