Cash Flow and Performance Evaluation Assignment

AC2620: Module 5 Cash Flow and Performance Evaluation

Exercise 5.1

ROI and EVA

1

ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects

and disposes of residential garbage. Information related to the two subsidiaries is as follows:

Hazardous

Waste

Residential

Waste

Total assets $13,000,000 $70,000,000

Noninterest-bearing current liabilities $3,000,000 $12,000,000

Net income $1,700,000 $6,000,000

Interest expense $1,250,000 $7,300,000

Required rate of return 12% 14%

Tax rate 40% 40%

Based on this information, perform the following tasks:

 Calculate ROI for both subsidiaries.

 Calculate EVA for both subsidiaries. Note that no adjustments for accounting distortions are being

made; therefore, EVA is equivalent to the residual income.

 Which subsidiary has added the most to shareholder value in the last year?

 Which subsidiary is the best candidate for expansion, based on the limited information provided to

you?

Submission Requirements:

 Answer the problem in detail with conclusions and results.

 Submit your answer in a Microsoft Excel file, showing step-by-step calculations.

Evaluation Criteria:

The exercise rubric will be used to evaluate your responses.