Question

Salsa Grocery has two divisions. One division, STORES, sells groceries through traditional grocery stores. The second division, CYBER, was formed two years ago and sells groceries through an online grocery ordering service. Data for the past year for the two divisions are as follows.

		STORES			CYBER
Total assets	$	120,000,000		$	15,000,000
Current liabilities		4,500,000			2,500,000
Net income (loss)		10,000,000			1,000,000
Weighted-average cost of capital		8	%		10	%

a. Evaluate the two divisions in terms of EVA.

Answer 1

STORES

CYBER

EVA

$ 7,60,000

$ -2,50,000

EVA stands for Economic Value Added.If EVA is positive it means company is generating value from invested capital.On the other hand , if EVA is negative, it means company is

not generating income from invested fund.

In this case, STORES has positive EVA whereas CYBER has negative EVA. It means STORES is successful in generating value from invested fund and it's performance is better than CYBER

who is failure in generating value from invested capital.

Working:

EVA

=

Net Income - (Invested Capital * Weighted Average cost of Capital)

So,

EVA of:

STORES

=

Net Income - (Invested Capital * Weighted Average cost of Capital)

=

$       1,00,00,000

-   (

$       11,55,00,000

x 8%)

=

$       1,00,00,000

-

$             92,40,000

=

$             7,60,000

Working:

Total Invested Capital

=

Total Assets - Current Liabilities

=

$       12,00,00,000

-

$ 45,00,000

=

$       11,55,00,000

and ,

CYBER

=

Net Income - (Invested Capital * Weighted Average cost of Capital)

=

$           10,00,000

-   (

$          1,25,00,000

x 10%)

=

$           10,00,000

-

$             12,50,000

=

$            -2,50,000

Working:

Total Invested Capital

=

Total Assets - Current Liabilities

=

$          1,50,00,000

-

$ 25,00,000

=

$          1,25,00,000