P12-9 a. Compute ROI and EVA for 2018 (shown for 2017 as an example). Poseidon E
ID: 2578541 • Letter: P
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P12-9 a. Compute ROI and EVA for 2018 (shown for 2017 as an example). Poseidon Electronics 2018 2017 Income from operations $990,000 $935,000 Less taxes at 40% 396,000 374,000 NOPAT $594,000 $561,000 (a) Total assets $4,400,000 $3,850,000 Less NIBCL 319,000 308,000 Invested Capital 4,081,000 3,542,000 (b) x Cost of capital 0.12 0.12 Required Profit 489,720 425,040 (c) (b x CoC) ROI 14.5% 15.8% (a/b) EVA $104,280 $135,960 (a-c) Has financial performance increased or declined for 2018? b. Evaluate the management assertion about income and investment (see text). c. Briefly explain how measuring EVA will drive managers to carefully evaluate the investment in assets. P12-9 a. Compute ROI and EVA for 2018 (shown for 2017 as an example). Poseidon Electronics 2018 2017 Income from operations $990,000 $935,000 Less taxes at 40% 396,000 374,000 NOPAT $594,000 $561,000 (a) Total assets $4,400,000 $3,850,000 Less NIBCL 319,000 308,000 Invested Capital 4,081,000 3,542,000 (b) x Cost of capital 0.12 0.12 Required Profit 489,720 425,040 (c) (b x CoC) ROI 14.5% 15.8% (a/b) EVA $104,280 $135,960 (a-c) Has financial performance increased or declined for 2018? b. Evaluate the management assertion about income and investment (see text). c. Briefly explain how measuring EVA will drive managers to carefully evaluate the investment in assets.Explanation / Answer
a) The ROI of 2018 is 14.5% as compared to 15.8% of 2017 and EVA is also decreased from $135,960 of 2017 to $104,280 of 2018. This shows that the performance of the company has declined for 2018 as compared to 2017.
b) The different management assertions include assertions of existence, completeness, rights and obligations, accuracy and valuation, and valuation and disclosure.The assertion of existence is the assertion that assets, liabilities balances appearing in the balance sheet actually exist. The assertion of completeness is an assertion that financial statements made are thorough and include every item that should be included.
Thus in the given case all these management assertions seems to be appropriate.
c) EVA is used to measure a value a company generates from the funds invested in it. A positive EVA shows that company is producing value from its investments. On the other hand, negative EVA shows that company is not generating value from the funds invested in it. Thus as the EVA if the company in this case is positive which shows that company's investments are adding value to its profits. In this way EVA helps managers in evaluating the investment in assets of the company.
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