Question

Barbara Company paid $8 million cash for research and development. EVA invested capital was computed as $20 million. Barbara Company's cost of capital was 20%. To add economic value to the firm, Barbara Company must generate revenues less operating costs of at least _____.

a) $4 million

b) $10 million

c) $6 million

d) $12 million

Answer 1

Barbara Company must generate revenues less operating costs of at least

a) $4 million

Invested Capital = $20 million

Income should be at least equal to cost of capital = ($20 million x 20% ) = 4 million

so revenue less operating costs must be more than 4 million.

The 8 million R&D is not taken into account because it is a sunk cost.