A company is debating replacing the GPS system in a company vehicle that is used every day of the work week. By replacing the current older model GPS system in the vehicle, the company anticipates being able to add an additional $1,324 of Operating Income this year that will ultimately result in an Economic Value Added (EVA) of $806.43. If the company has a tax rate of 22% and a Weighted Average Cost of Capital (WACC) of 7.5%, then what is the cost of the new investment?
A) $2,130.43
B) $3,017.20
C) $10,752.40
D) $13,769.60

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for EVA: After-tax Operating Income - (WACC × Invested Capital). In this case, solve for investment using the other variables provided. $806.43 = ($1,324 × (1 - 0.22)) - (0.075 × Investment). $806.43 = $1,032.72 - (0.075 × Investment). (0.075 × Investment) = $226.29. Lastly, divide each side by 0.075. Investment = $3,017.20 (Choice B).

A Company Is Debating Replacing the GPS System in a Company