EVA Ohio Building Products (OB

EVA Ohio Building Products (OBP) is considering the launch of a new product that would require an initial investment in equipment of $30,800 (no investment in working capital is required). The forecast profits from the product are as follows:

No cash flows are forecast after year 2, and the equipment will have no salvage value. The cost of capital is 10%.

a. What is the project’s NPV?

b. Calculate the expected EVA and the return on investment in each of years 1 and 2.

c. Why does EVA decline between years 1 and 2, whereas the return on investment is unchanged?

d. Calculate the present value of the economic value added. How does this figure compare with the project NPV?

e. What would be the return on investment and EVA if OBP chooses instead to depreciate the investment straight line? Do you think that this would provide a better standard for measuring subsequent performance?

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