Within a large rental corporation where the commercial rental segment dominated, Gary managed the residential rental segment. Gary enjoyed taking the underdog role, trying to generate more income and higher returns than corporate expected. The corporate minimum required return was 8%, while its WACC was 7%. He recently became aware of new rental properties in a prime location. He assumed he'd be able to secure two key rental properties in his target area. He considered where his division stood in terms of profitability and asset position at year-end, and created a projection for the next year as follows. Sales Gross margin Operating income After-tax operating income Operating assets Total assets Current liabilities Current Year-End $638,000 295,000 138,000 100,900 1,450,000 1,720,000 201,000 Projected Next Year $812,000 408,000 193,000 142,700 2.210,000 2.510,000 270,000
Within a large rental corporation where the commercial rental segment dominated, Gary managed the residential rental segment. Gary enjoyed taking the underdog role, trying to generate more income and higher returns than corporate expected. The corporate minimum required return was 8%, while its WACC was 7%. He recently became aware of new rental properties in a prime location. He assumed he'd be able to secure two key rental properties in his target area. He considered where his division stood in terms of profitability and asset position at year-end, and created a projection for the next year as follows. Sales Gross margin Operating income After-tax operating income Operating assets Total assets Current liabilities Current Year-End $638,000 295,000 138,000 100,900 1,450,000 1,720,000 201,000 Projected Next Year $812,000 408,000 193,000 142,700 2.210,000 2.510,000 270,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
H4.
Transcribed Image Text:Within a large rental corporation where the commercial rental segment dominated, Gary managed the residential rental segment.
Gary enjoyed taking the underdog role, trying to generate more income and higher returns than corporate expected. The corporate
minimum required return was 8%, while its WACC was 7%. He recently became aware of new rental properties in a prime location. He
assumed he'd be able to secure two key rental properties in his target area. He considered where his division stood in terms of
profitability and asset position at year-end, and created a projection for the next year as follows.
Sales
Gross margin
Operating income
After-tax operating income
Operating assets
Total assets
Current liabilities
Current Year-End
$638,000
295,000
138,000
100,900
1,450,000
1,720,000
201,000
Projected Next Year
$812,000
408,000
193,000
142,700
2.210,000
2.510,000
270,000
Transcribed Image Text:Your answer is partially correct.
Assume that in addition to ROI, corporate evaluates division managers on their ability to generate positive EVA. Calculate the
EVA for this division for both time periods. (Enter negative amounts with either a sign eg.-15,000 or in parenthesis eg. (15,000))
A
Current EVA
$
Projected EVA $
-15100
-34100
Would Gary be motivated to make these purchases if he is evaluated based on EVA?
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