Question

how do gou calculate the eva?

Universal Electronics, Inc. (UEl), which started operations one year ago, has two divisions: Consumer and Commercial. Both divisions invest heavily in R&D, which is assumed to benefit five years. R&D spending is made uniformly throughout the year. UEl has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows. Connercial $49,000 5,535 30,750 1,600 1,800 Consumer Sales revenue Divisional incone Divisional investmont $30,e00 5,400 29,500 Current liabilities R&D 1,800 1,800 Required: Evaluate the performance of the two divisions assuming UEl uses economic value added (EVA). (Enter your answers in dollars rounded to 1 decimal place.) EVA of Consumer division EVA of Commercial division Which division performed better?

Answer 1

Evaluation of performance of the two divisions assuming UEI uses economic value added are as follows

EVA of Consumer division	2,155.00
EVA of Commercial division	2,130.50
Which division performed better ?	Consumer division is better than commercial division because of its greater EVA

Working Notes

EVA = Net Operating Profit After Tax - Capital Costs

Capital Costs = Total Capital X Cost of Capital

For Consumer Division

Net Opertating Profit After Tax = 5,400 it is assumed that divisional income given in the question is net operating profit after tax

Total Capital = Divisional Investment + R & D - Current Liabilities

= 29,500+1,800-1,800 = 29,500

Cost of capital = 11% as given in the question

Now Capital cost = 29,500 X 11%

=3,245

EVA = 5,400 - 3,245

= 2,155

For Commercial Division

Net Opertating Profit After Tax = 5,535 it is assumed that divisional income given in the question is net operating profit after tax

Total Capital = Divisional Investment + R & D - Current Liabilities

= 30,750+1,800 - 1,600

= 30,950

Cost of capital = 11% as given in the question

Now Capital cost = 30,950 X 11%

= 3,404.50

EVA = 5,535 - 3,404.50

= 2,130.50