Paula Boothe, president of the Bramble Corporation, has mandated a minimum 12% r
ID: 2580353 • Letter: P
Question
Paula Boothe, president of the Bramble Corporation, has mandated a minimum 12% return on investment for any project undertaken by the company. Given the company's decentralization. Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 12%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 12% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,828,000 in a new line of energy drinks that is expected to generate $242,000 in operating income. Assume that Bramble Corporation's actual weighted-average cost of capital is 10% and its tax rate is 32%Explanation / Answer
Economic value added = Operating income [1-tax] - [WACC* Capital invested]
= 242000 [1-.32] - [.10*1828000]
= 164,560- 182,800
= - 18240