Win Tech Motors Case In 2013, five retired software developers opened an auto de
ID: 2458422 • Letter: W
Question
Win Tech Motors Case
In 2013, five retired software developers opened an auto dealership in Redmond, Washington, which they named WinTechMotors.
The company specialized in high-end sports and luxury autos and has one of the largest inventories of used Porsches on the
West Coast. (more than 50 Porsches are always in stock.) The inventory is listed on the Company's Web site, and the Company
has shipped cars to Web customers as far away as Florida, although most customers are located in Washington, Oregon
and California. Comparative income statements and balance sheets are presented in the next tab. As indicated, the company
has sales of $15,120,000 in 2014 (a 25 percent increase over 2013) and net income of $326,950 (a 91 % increase over 2013).
The owners were delighted with the company's financial performance and quite proud that they had developed a successful
business. However, at a recent meeting, their company's external accountants introduced them to the concept of EVA and noted that,
with an assumed weighted average cost of capital of 12 percent, their EVA had been negative in both years. Accordingly, the
owners have contracted with an EVA consultant to help them with financial planning.
Required
a. Calculate EVA for 2014 and 2013 using a cost of capital of 12%. No adjustments for accounting distortions are needed.
Explain why sales and income have increased substantially in 2014 and yet EVA is negative. What is not captured
in income that is captured in EVA?
Income Statements
2014
2013
Sales
15,120,000
12,104,000
Cost fo autos sold
13,618,000
10,894,000
Gross Margin
1,502,000
1,210,000
Selling & Adm
936,000
889,200
Interest
63,000
58,500
Income before taxes
503,000
262,300
Income taxes
176,050
91,805
Net income
326,950
170,495
2014
2013
EVA
NOPAT
Income before Taxes
Add interest
Nos.
EBIT
60,61
Income Tax
176,050
91,805
NOPAT
326,950
170,495
62-63
Income Tax %
0.35
0.35
Cost of Capital
12%
12%
Invested Capital
EVA
-
-
66, 67
Under performance
326,950
170,495
68, 69
Balance Sheet
2014
2013
Assets
Cash & ST Investments
58,500
63,000
Receivables
355,500
288,000
Inventory
5,625,000
5,040,000
Current Assets
6,039,000
5,391,000
Building & Equip, net
860,400
855,000
Other Assets
48,600
54,000
Total Assets
6,948,000
6,300,000
Liabilities & Equity
Accounts Payable
276,300
117,000
ST Debt Payable
81,000
67,500
Taxes payable
103,500
36,000
Current liabilities
460,800
220,500
Long-term Debt
625,500
544,500
Total Liabilities
1,086,300
765,000
Retained earnings
821,700
495,000
Common stock
5,040,000
5,040,000
Total Liabilities & Equity
6,948,000
6,300,000
Total Assets
6,948,000
6,300,000
Less:NIBCL
Nos.
Invested capital
6,948,000
6,300,000
64,65
NIBCL
noninterest bearing current liabilities
Win Tech Motors Case
In 2013, five retired software developers opened an auto dealership in Redmond, Washington, which they named WinTechMotors.
The company specialized in high-end sports and luxury autos and has one of the largest inventories of used Porsches on the
West Coast. (more than 50 Porsches are always in stock.) The inventory is listed on the Company's Web site, and the Company
has shipped cars to Web customers as far away as Florida, although most customers are located in Washington, Oregon
and California. Comparative income statements and balance sheets are presented in the next tab. As indicated, the company
has sales of $15,120,000 in 2014 (a 25 percent increase over 2013) and net income of $326,950 (a 91 % increase over 2013).
The owners were delighted with the company's financial performance and quite proud that they had developed a successful
business. However, at a recent meeting, their company's external accountants introduced them to the concept of EVA and noted that,
with an assumed weighted average cost of capital of 12 percent, their EVA had been negative in both years. Accordingly, the
owners have contracted with an EVA consultant to help them with financial planning.
Required
a. Calculate EVA for 2014 and 2013 using a cost of capital of 12%. No adjustments for accounting distortions are needed.
Explain why sales and income have increased substantially in 2014 and yet EVA is negative. What is not captured
in income that is captured in EVA?
Explanation / Answer
Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of a corporation. EVA can be calculated as net operating after taxes profit minus a charge for the opportunity cost of the capital invested. Economic value added (EVA) is an internal management performance measure that compares net operating profit to total cost of capital. Here we need the total Capital Employed which is a combination of Equity and Long term Debt which is calculated below
Calculaion of EVA
Thus we have a negative EVA
Economic Value added do not consider the Sales but considers Income after Taxes and therefore though the Sales and Income has increased it has not increased subtancialy to recover the Cost of Capital Employed in the business which is as high as 12% - Reason for EVA is negative is the Total Income after all the Taxes and Interest is still lower than the Cost of Capital Employed
It is this cost of Capital / Capital Charges which are not captured in income however is captured in EVA
a Long-term Debt 625500 544500 b Retained earnings 821700 495000 c Common stock 5040000 5040000 1 Capital Employed ( a+b+c) 6487200 6079500 2 cost of capital ( given ) 12% 12% 3 Capital Charge ( 1x 2) 778464 729540 4 NOPAT ( given ) 326950 170495 5 Economic Value Added ( 4-3) -451514 -559045Related Questions
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