Salsa Grocery has two divisions One division STORES sells gr

Salsa Grocery has two divisions. One division, STORES, sells groceries through traditional grocery stores. The second division, CYBER, was formed two years ago and sells groceries through an online grocery ordering service. Data for the past year for the two divisions are as follows.

a. Evaluate the two divisions in terms of EVA.

		STORES			CYBER
Total assets	$	120,000,000		$	15,000,000
Current liabilities		4,500,000			2,500,000
Net income (loss)		10,000,000			1,000,000
Weighted-average cost of capital		8	%		10	%

Solution

STORES CYBER EVA $ 7,60,000 $ -2,50,000 EVA stands for Economic Value Added.If EVA is positive it means company is generating value from invested capital.On the other hand , if EVA is negative, it means company is not generating income from invested fund. In this case, STORES has positive EVA whereas CYBER has negative EVA. It means STORES is successful in generating value from invested fund and it\'s performance is better than CYBER who is failure in generating value from invested capital. Working: EVA = Net Income - (Invested Capital * Weighted Average cost of Capital) So, EVA of: STORES = Net Income - (Invested Capital * Weighted Average cost of Capital) = $       1,00,00,000 -   ( $       11,55,00,000 x 8%) = $       1,00,00,000 - $             92,40,000 = $             7,60,000 Working: Total Invested Capital = Total Assets - Current Liabilities = $       12,00,00,000 - $ 45,00,000 = $       11,55,00,000 and , CYBER = Net Income - (Invested Capital * Weighted Average cost of Capital) = $           10,00,000 -   ( $          1,25,00,000 x 10%) = $           10,00,000 - $             12,50,000 = $            -2,50,000 Working: Total Invested Capital = Total Assets - Current Liabilities = $          1,50,00,000 - $ 25,00,000 = $          1,25,00,000