The SCC has $1 billion of capital invested in several telecommunication projects

Question

The SCC has $1 billion of capital invested in several telecommunication projects that are expected to generate a pre-tax operating profit of $170 million next year. SCC has an estimated pre-tax cost of capital of 15 precent.  Assuming that pre-tax economic value added (EVA) for next year is $25.5 million and the EVA on expected return on invested capital is $20 million. SCC is considering five possible actions that should improve its expected pre-tax EVA. These are as follows: 1. A $10 million reduction in operating expenses that should not affect revenues. 2. A $60 million reduction in invested capital that should not affect operating profit. 3. A re-examination of its capital structure (debt-to-equity ratio) that could lower its pre-tax cost of capital to 14 percent. 4. The sale of assets at their book value of $100 million. These assets are expected to generate a pre-tax operating profit of $10 million next year. 5. The acquisition of assets worth $100 million. These assets are expected to generate a pre-tax operating profit of $20 million next year.

Show how each of these decisions would improve SCC's expected pre-tax economic value added.

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