Economic value added of proposed new line of energy drinks

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Reference no: EM132014436

Paula Boothe, president of the Culver Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company. Given the company’s decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 10%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 14% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,843,000 in a new line of energy drinks that is expected to generate $218,000 in operating income. Assume that Culver Corporation’s actual weighted-average cost of capital is 9% and its tax rate is 32%.

Calculate the economic value added of the proposed new line of energy drinks. (If the economic value added is negative then enter with a negative sign preceding the number e.g. -5,125 or parenthesis. e.g. (5,125). Round answer to 0 decimal places, e.g 5,125.)

Economic value added $

If Martin Koch is evaluated based on economic value added, will he choose to invest in the new line of energy drinks?

Yes No

Reference no: EM132014436

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