In conducting an EVA analysis for year 2 for new equipment on its primary product line, Analogy, Inc., manufacturers of preassembled blower packages and other water treatment components, determined the EVA to be $28,000. Analogy uses an after-tax interest rate of 14% per year and its Te is 35%. The new equipment had a first cost of $550,000 and was MACRS depreciated using a 3-year recovery period. Since the company CEO knew that the GI was $500,000, he asked you to determine the operating expenses (OE) associated with the equipment in year 2.
What will be an ideal response?
Find BVt-1 and solve for NOPAT and TI, year 2, and solve for OE
BV1 = 550,000 – 550,000(0.3333) = $366,685
Year 2 results:
EVA = 28,000 = NOPAT – (0.14)(366,685)
NOPAT = $79,336
79,336 = TI(1 – Te) = TI(1 – 0.35)
TI = $122,055
D2 = 550,000(0.4445) = $244,475
TI2 = GI – OE - D
122,055 = 500,000 - OE - 244,475
OE = $133,470
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What will be an ideal response?
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