Reference no: EM13957214
The company specializes in high-end sports and luxury autos and has one of the largest inventories of used Porsches on the West Coast, (More than 50 Porsches are always in stock.) The inventory is listed on the company's Web site (WinTechMotors.Com) and the company has shipped cars to Web customers as far away as Florida, although most customers are located in Washington, Oregon, and California. In 2011, an industry publication (Motor Watch) listed WinTech as the fastest- growing luxury auto dealership on the West Coast. Comparative income statements and balance sheets are presented in the table on the right. As indicated, the company had sales of $16,800,000 in 2011 (a 25 percent increase over 2010) and net income of $370,500 (a 95 percent increase over 2010).The owners were delighted with the company's financial performance and quite proud that they had developed a successful business. However, at a recent meeting, their company's external accountants introduced them to the concept of EVA and noted that, with an assumed weighted average cost of capital of 16
Required:
a. Calculate EVA for 2011 and 2010 using a cost of capital of 16 percent. No adjustments for accounting distortions are needed. Explain why sales and income have increased substantially in 2011 and yet EVA is negative. What is not captured in income that is captured in EVA?
b. The owners realize they must cut back on inventory to earn a zero or positive EVA in the coming year. To get a handle on this, they would like you to calculate the maximum amount of inventory that could have been on hand at the end of 2011 for the company to achieve a zero level of EVA.
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c. Assume the average car has a cost of $50,000. Also assume that sales, expenses, assets (except inventory), and liabilities are roughly the same in 2012 as in 2011. How many cars must be cut from inventory to achieve zero EVA in 2012?
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