WACC and EVA
Response to the following problem:
Elsie Vinton Laboratories is evaluating the purchase of five new MRI machines for its labs at various locations in Vancouver for $9,000,000, which will increase the company's before-tax profit by $1.2 million per year. The company uses both long-term debt and equity capital to raise funds. The value of long-term debt held by the company is $15,200,000. Its equity market value is $21,345,000. The costs of debit and equity are 12% and 9%, respectively. Elsie Vinton reports total assets of $45,000,000 and before-tax profit of $8,325,000. The tax rate for Elsie Vinton is 32%. The current liabilities at the end of the period totaled $825,000.
Note: the new investment will not impact the company's WACC, current liabilities, or tax rate.
a. What is Elsie Vinton's EVA prior to the investment in the MRI machines?
b. How will the company's EVA change with the MRI investment?
c. Based on the EVA calculations, should Elsie Vinton pursue this investment?