A firm has an average investment of $20,000 during the year. During the same period, the firm generates an after-tax income of $5,000. The cost of capital is 20 percent. Required: a) Calculate the economic value added (EVA) for the firm. b) Calculate the net return on the investment (ROI) for the firm.
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A firm has an average investment of $20,000 during the year. During the same period, the firm generates an after-tax income of $5,000. The cost of capital is 20 percent.
Required:
a) Calculate the economic value added (EVA) for the firm.
b) Calculate the net return on the investment (
Step by step
Solved in 2 steps
- 1.) A firm has an average investment of $100,000 during the year. During the same period, the firm generates an after-tax income of $16,000. The cost of capital is 15 percent. what is the economic profit? Required: a.) Calculate the ROI and calculate the Economic Profit.The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Investment Sales revenue Operating costs Depreciation Net working capital spending Net income Year O $27,000 Year 1 $ Cash flow 330 Year 1 $14,000 $14,500 3,000 6,750 380 280 a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) Year 2 Year 2 Year O $-27330 Year 3 3,100 3,200 6,750 6,750 430 330 3069 $15,000 $12,000 2,400 6,750 ? Year 1 $ Year 4 Year 3 b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) 3333 Year 4 $ Year 2 $ c. Suppose the…The income statement for Forklift Electrical Ltd for two years is attached as a pic. Required: Assuming an 8% cost of capital, calculate the residual income for each year. Would the management of Forklift Electrical Ltd have been more likely to accept the investment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer
- As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?1 Suppose you have a firm with investor-supplied capital of $30 million. Further suppose that the WACC of the firm is 9%, and you are given the following income statement of the firm. Show work for all parts requiring computation. sales 26 M operating cost 16 m interest expense 3m Taxes (44%) What is the net income of the firm? What is the EVA of the firm? What is the difference between EVA and MVA?A company wants to invest $619,932 today. The expected returns in years 1, 2, and 3 are $244,539, $175,421, and $341,884, respectively. If the rate of return on investment must be at least 15%, and the probability of commercial and technical success are 0.89 and 0.86, respectively. What is the maximum expenditure justified that the company may spend?
- Karen Lamont is in the process of starting a new business and wants to forecast the first year's income statement and balance sheet. She has made several assumptions, which are shown below: Lamont has projected the firm's sales will be $1 million in the first year. She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively. For working capital, Lamont has estimated the following: Accounts receivable as a percentage of sales: 12% Inventory as a percentage of sales: 15% Accounts payable as a percentage of sales: 7% Accruals as a percentage of sales: 5% A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate. The firm's tax rate will be 30 percent. Lamont will need to purchase $350,000 in plant and equipment. Lamont will provide any other financing needed.Based on Lamont's assumptions in Situation 3, prepare a pro forma income…Karen Lamont is in the process of starting a new business and wants to forecast the first year's income statement and balance sheet. She has made several assumptions, which are shown below: Lamont has projected the firm's sales will be $1 million in the first year. She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively. For working capital, Lamont has estimated the following: Accounts receivable as a percentage of sales: 12% Inventory as a percentage of sales: 15% Accounts payable as a percentage of sales: 7% Accruals as a percentage of sales: 5% A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate. The firm's tax rate will be 30 percent. Lamont will need to purchase $350,000 in plant and equipment. Lamont will provide any other financing needed.If her estimates in Situation 3 are correct, what will be the firm's current…A project generates revenues of $10,000, has cash expenses of $800, and depreciation charges of $500 in a particular year. The firm's tax rate is 25%. What is the firm's net income or cash flow from operations?
- Consider the following data: Free Cash Flow 1 = $27 million; Free Cash Flow 2 = $43 million; Free Cash Flow 3 = $48 million. Free Cash Flow 4= $62 million. Assume that free cash flow grows at a rate of 6 percent for year 5 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.An investment costs $23,958 and will generate cash flow of $6,000 annually for five years. The firm’s cost of capital is 10 percent. a.) What is the investment’s internal rate of return? Based on the internalrate of return, should the firm make the investment? b.) What is the investment’s net present value? Based on the net presentvalue, should the firm make the investment?1 Suppose you have a firm with investor-supplied capital of $30 million. Further suppose that the WACC of the firm is 9%, and you are given the following income statement of the firm. Show work for all parts requiring computation. sales 26 M operating cost 16 m interest expense 3m Taxes (44%) What is the net income of the firm?