80.2K

Verified Solution

Link Copied!

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

Answer & Explanation Solved by verified expert

See Answer