Answered: Required: Calculate the EVA for each…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Question

Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000,000.

Required:

Calculate the EVA for each of Banyan’s divisions.

Calculate the residual income (RI) for each of Banyan’s division.

If Banyan uses EVA to evaluate the projects, which division has the better project and by how much?

If Banyan uses RI, which division has the better project and by how much?

What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?

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