Esther is the manager of the sales department for a local appliance store. The employees have been voicing their concerns over the current Point-of-Sale (POS) system they use for various aspects of their job. A new machine would afford them the opportunity to better service customers, including real-time pricing and an on-the-spot checkout process. The new POS system would cost $31,828 and would generate $7,442 of Operating Income. The company has a Required Rate of Return of 8% and their tax rate is 23%. If the Weighted Average Cost of Capital (WACC) is 6.7%, then what would their Economic Value Added (EVA) be? (Do not round intermediate calculations.)
A) $3,184.10
B) $3,597.86
C) $4,895.76
D) $5,309.52

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). This question includes a required rate of return, but that information is not needed for this question. EVA = ($7,442.00 × (1 - 0.23)) - (0.067 × $31,828.00) = $5,730.34 - $2,132.48 = $3,597.86 (Choice B).

Esther Is the Manager of the Sales Department for a Local