Chapter 12, Problem 4PB

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.

A. Calculate the EVA for each of Banyan’s divisions.

B. Calculate the RI for each of Banyan’s division.

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

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

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