Concept explainers
EVA Ohio Building Products (OBP) is considering the launch of a new product that would
require an initial investment in equipment of $30,800 (no investment in working capital is
required). The
No cash flows are forecast after year 2, and the equipment wi ll have no salvage value. The
cost of capital is 10%.
a. What is the project's
b. Calculate the expected EVA and the
c. Why does EVA decline between years 1 and 2, whereas the return on investment is
unchanged?
d. Calculate the present value of the economic value added. How does this figure compare
with the project NPV?
e. What would be the return on investment and EVA if OBP chooses instead to
the investment straight line? Do you think that this would provide a better standard for
measuring subsequent performance?
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