ACC-650 TOPIC 7 Assignment

Question 9 of 12

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Paula Boothe, president of the Bridgeport Corporation, has mandated a minimum 10% return on investment for any project undertaken by the company. Given the company's decentralization, Paula leaves all investment decisions to the divisional managers as long as they anticipate a minimum rate of return of at least 12%. The Energy Drinks division, under the direction of manager Martin Koch, has achieved a 13% return on investment for the past three years. This year is not expected to be different from the past three. Koch has just received a proposal to invest $1,835,000 in a new line of energy drinks that is expected to generate $313,000 in operating income. Assume that Bridgeport Corporation's actual weighted-average cost of capital is 10% and its tax rate is 30%.

(a)

Calculate the economic value added of the proposed new line of energy drinks. (If the economic value added is negative then enter with a negative sign preceding the number, e.g. -5,125 or parenthesis, e.g. (5,125). Round answer to 0 decimal places, e.g. 5,125.)

Economic value added

$