Paula Boothe, president of the Ayayai Corporation, has mandated a minimum 8% return on investment for any project undertaken by the company. Given the company's decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin. Koch, has achieved a 12% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a new line of energy drinks that is expected to generate $310,000 in operating income. Assume that Ayayai Corporation's actual weighted-average cost of capital is 9% and its tax rate is 30%. (a) Calculate the economic value added of the proposed new line of energy drinks. (If the economic value added is negative then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125). Round answer to 0 decimal places, e.g. 5,125.) Economic value added $
Paula Boothe, president of the Ayayai Corporation, has mandated a minimum 8% return on investment for any project undertaken by the company. Given the company's decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin. Koch, has achieved a 12% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a new line of energy drinks that is expected to generate $310,000 in operating income. Assume that Ayayai Corporation's actual weighted-average cost of capital is 9% and its tax rate is 30%. (a) Calculate the economic value added of the proposed new line of energy drinks. (If the economic value added is negative then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125). Round answer to 0 decimal places, e.g. 5,125.) Economic value added $
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Paula Boothe, president of the Ayayai Corporation, has mandated a minimum 8% return on investment for any project undertaken by the company. Given the company's decentralization, Paula
leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin
Koch, has achieved a 12% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,800,000 in a
new line of energy drinks that is expected to generate $310,000 in operating income. Assume that Ayayai Corporation's actual weighted-average cost of capital is 9% and its tax rate is 30%.
(a)
Calculate the economic value added of the proposed new line of energy drinks. (If the economic value added is negative then enter with a negative sign preceding the number, e.g.
-5,125 or parenthesis, e.g. (5,125). Round answer to 0 decimal places, e.g. 5,125.)
Economic value added $
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