Problem
Creative Learning Centers (CLC), a for-profit firm, operates over 100 preschools primarily located in the northeast for children ages 4-6. CLC's innovative curriculum utilizes the latest technology and offers young minds creative expression, language and social skills, physical movement, music, and number skills-all provided by professional trained teachers. CLC leases buildings for their schools and invests substantial resources in leasehold improvements for classrooms, technology, and playground equipment. CLC's cost of capital is 12 percent. Typical tuition is about $6,300 per year for a page 194five-day-a-week, four-hour-per-day program. Maria Schnelling manages 15 CLC schools in the state of Virginia. She has decision-making responsibility for staffing and operating her schools, as well as the responsibility for recommending adding new schools and closing existing schools. The following table provides current operating data on all of her 15 preschools, and breaks out her top- and bottom-performing schools:
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After tax operating income
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Total investment
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All 15 Virginia preschools
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$1,811,250
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$11,625,000
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Best 3 Virginia performers
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|
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VA4
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$184,230
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$801,000
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VA12
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$156,030
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$743,000
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VA9
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$151,000
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$755,000
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Worst 3 Virginia performers
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|
|
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VA2
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$34,000
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$680,000
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VA8
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$14,200
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$710,000
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VA5
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-$23,700
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$790,000
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"After-tax operating income" represents all revenues less all expenses (including depreciation and taxes but excluding any interest on debt to finance the investment) of running a school for the last 12 months.
Ms. Schnelling has identified three possible locations for new CLC preschools in Virginia (denoted as NVA1, NVA2, and NVA3). The following table provides current projected data on the three new preschools:
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After tax operating income
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Total investment
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NVA1
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$132,000
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$880,000
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NVA2
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$110,500
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$850,000
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NVA3
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$79,200
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$720,000
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Task
A. If Maria Schnelling is evaluated and rewarded based on after-tax operating income, which of her 15 existing schools will she recommend closing, and which of her three new schools will she recommend opening? (Justify your answers.)
B. If Maria Schnelling is evaluated and rewarded based on return on investment, which of her existing 15 schools will she recommend closing, and which of her three new schools will she recommend opening? (Show computations.)
C. You have been hired as a consultant to the board of directors to advise the board as to how CLC should measure and reward the performance of CLC managers, such as Ms. Schnelling in Virginia. How should CLC measure and reward its state managers? Provide a compelling rationale to support your recommendation. (Support your recommendation with relevant computations.)