Exercise 10-18 (Part Level Submission) Paula Boothe, president of the ange Corpo

Question

Exercise 10-18 (Part Level Submission) Paula Boothe, president of the ange Corporation, has mandated a minimum 10% et m on nvestment or any project undertaken by the company ven the company s decentralization, Paula ea es all nvestment dec s ons to he divisional managers as long as they anticipate a minimum rate of eturn o at least 10% T e Energy Drinks dlvis on under the direction o manager Martin Koch has ac eved a 12% return on investment or the past three years. This year s not expected to be different rom the past three. Koch has ust received a proposal to invest $1,816,000 in a ne line of energy drinks that is expected to generate s2 21,000 in operating income. Assume that A mange Corporation's actual eighted average cost of capital is 10% and its tax rate is 30% line of energy Drinks dlymum 10% as ted-averac. This ear s rate is 30%,me past Ca culate the economic value ad ed of ,125. e proposed new ne o If he economic value added s negative then enter wa h energy drin s a negative so n preceding the number e q 5 2 5 or parent hesis. e q 5,125). Round answer o ü decunal places e.q Econemic value added

Explanation / Answer

Economic Value Added of the proposed new line of energy drinks = - $26,900 (Negative)

Economic value added (EVA)

= Operating income after tax – Cost of Capital

= [ $2,21,000 (1-0.30)] – [ $18,16,000 x 10%]

= $1,54,700 - $1,81,600

= - $26,900 (Negative EVA)

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.