Question

Effective income tax rate 50% After-tax MARR 12% EOY BTCF Depreciation Taxable income Income Taxes ATCF 0$ (95,000.00) - $ 195,000.00) 1 $ 37,000.00 $ 23,750.00 $ 13,250.00 - $6,625.00 $ 30,375.00 2$ 37,000.00 $ 23,750.00 $ 13,250.00 $6,625.00 $ 30,375.00 3$ 37,000.00 $ 23,750.00 $ 13,250.00 - $6,625.00 $ 30,375.00 4$ 37,000.00 $ 23,750.00 $ 13,250.00 - $6,625.00 $ 30,375.00 For the given table, find the EVA in year 3 (please round the result to integer, e.g. If the result is $5.732.07, fill in 5732); Should this project be invested based on the annual present/future equivalent EVA (fill in '1' if the answer is 'yes', otherwise fill in "0")?

Answer 1

EVA=Economic Value Added= ATCF-(Invested capital*MARR)
EVA in Yr. 3
Year	ATCFs	Future value factor		ATCF*FVF
0	-95000	1.12^3=	1.4049	-133468
1	30375	1.12^2=	1.2544	38102.4
2	30375	1.12^1=	1.12	34020
3	30375	1.12^0	1	30375
		Total FV at Yr.3=		102497.4
		Less:(133468*12%)		16016.18
			EVA at Yr.3	86481.22
ANSWER:	86481

Annual equivalent EVA=
30375-(95000*12%)=
18975

Present equivalent EVA
Year	ATCFs	PV F at 12%	PV at 12%
0	-95000	1	-95000
1	30375	0.89286	27121
2	30375	0.79719	24215
3	30375	0.71178	21620
4	30375	0.63552	19304
		Total PV at Yr.0	92259
	Less:(95000*12%)		11400
		EVA at Yr.0	80859
Present equivalent EVA= 80859

Future equivalent EVA
Year	ATCFs	Future value factor		ATCF*FVF
0	-95000	1.12^4=	1.5735194	-149484
1	30375	1.12^3=	1.404928	42674.69
2	30375	1.12^2=	1.2544	38102.4
3	30375	1.12^1	1.12	34020
4	30375	1.12^0=	1	30375
		Total FV at Yr.4=		145172.1
		Less:(149484*12%)		17938.08
			EVA at Yr.4	127234
Future equivalent EVA= 127234

ANSWER:
1. YES
As the Annual/Present/Future equivalent values of ATCF is more than the MARR on the invested capital in all cases.