(WACC and EVA) 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 totalled $825,000.
Note: the new investment will not impact the company’s WACC, current liabilities, or tax rate.
- What is Elsie Vinton’s EVA prior to the investment in the MRI machines?
- How will the company’s EVA change with the MRI investment?
- Based on the EVA calculations, should Elsie Vinton pursue this investment?