Sharon is the lead salesperson for U-Link, a telecommunications company. The company has been looking into ways that it can become more secure. One of the big decisions being considered by management is addressing the current security system they have in place at their corporate headquarters. In doing so, U-Link can expand its offerings to include on-site data storage. Sharon has narrowed the choices down to either fixing the existing system (Repair) or purchasing a replacement system (Replace). She has gathered pertinent information to perform some analysis: U-Link has been in business for a number of years and knows that something must change in order for their business to continue to grow. U-link has a Required Rate of Return of 8.2%, has a Weighted Average Cost of Capital (WACC) of 6.4%, a tax rate of 21%, and will use the straight-line depreciation method. (Do not round your calculations.)
a. What is the Return on Investment (ROI) for each option? Which would be the better choice if the decision was based upon ROI only?
b. What is the Residual Income of each option? What is the Economic Value Added (EVA) of each option? c. Based upon all the percentages generated, how can all of this data be interpreted? Which choice is the better option for U-Link?

Question

Sharon is the lead salesperson for U-Link, a telecommunications company. The company has been looking into ways that it can become more secure. One of the big decisions being considered by management is addressing the current security system they have in place at their corporate headquarters. In doing so, U-Link can expand its offerings to include on-site data storage. Sharon has narrowed the choices down to either fixing the existing system (Repair) or purchasing a replacement system (Replace). She has gathered pertinent information to perform some analysis:  U-Link has been in business for a number of years and knows that something must change in order for their business to continue to grow. U-link has a Required Rate of Return of 8.2%, has a Weighted Average Cost of Capital (WACC) of 6.4%, a tax rate of 21%, and will use the straight-line depreciation method. (Do not round your calculations.) 
a. What is the Return on Investment (ROI) for each option? Which would be the better choice if the decision was based upon ROI only?
b. What is the Residual Income of each option? What is the Economic Value Added (EVA) of each option? c. Based upon all the percentages generated, how can all of this data be interpreted? Which choice is the better option for U-Link?

Quizplus · Accepted Answer

The Answer of Sharon is the lead salesperson for U-Link, a telecommunications company. The company has been looking into ways that it can become more secure. One of the big decisions being considered by management is addressing the current security system they have in place at their corporate headquarters. In doing so, U-Link can expand its offerings to include on-site data storage. Sharon has narrowed the choices down to either fixing the existing system (Repair) or purchasing a replacement system (Replace). She has gathered pertinent information to perform some analysis:  U-Link has been in business for a number of years and knows that something must change in order for their business to continue to grow. U-link has a Required Rate of Return of 8.2%, has a Weighted Average Cost of Capital (WACC) of 6.4%, a tax rate of 21%, and will use the straight-line depreciation method. (Do not round your calculations.) 
a. What is the Return on Investment (ROI) for each option? Which would be the better choice if the decision was based upon ROI only?
b. What is the Residual Income of each option? What is the Economic Value Added (EVA) of each option? c. Based upon all the percentages generated, how can all of this data be interpreted? Which choice is the better option for U-Link?

Sharon Is the Lead Salesperson for U-Link, a Telecommunications Company