The company specializes 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 (WinTechMotors.Com) and the company has shipped cars to Web customers as far away as Florida, although most customers are located in Washington, Oregon, and California. In 2011, an industry publication (Motor Watch) listed WinTech as the fastest- growing luxury auto dealership on the West Coast. Comparative income statements and balance sheets are presented in the table on the right. As indicated, the company had sales of $16,800,000 in 2011 (a 25 percent increase over 2010) and net income of $370,500 (a 95 percent increase over 2010).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 16

Required
a. Calculate EVA for 2011 and 2010 using a cost of capital of 16 percent. No adjustments for accounting distortions are needed. Explain why sales and income have increased substantially in 2011 and yet EVA is negative. What is not captured in income that is captured in EVA?
b. The owners realize they must cut back on inventory to earn a zero or positive EVA in the coming year. To get a handle on this, they would like you to calculate the maximum amount of inventory that could have been on hand at the end of 2011 for the company to achieve a zero level of EVA.

c. Assume the average car has a cost of $50,000. Also assume that sales, expenses, assets (except inventory), and liabilities are roughly the same in 2012 as in 2011. How many cars must be cut from inventory to achieve zero EVA in2012?

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Comparative Financial Statements: WinTechMotors 2011 2010 Sales Less cost of autos sold Gross margin Less selling and $16,800,000 $13,450,000 12,105,000 1,345,000 15,120,000 1,680,000 administrative expense 1,040,000 Interest Income before taxes Income taxes 988,000 65,000 292,000 102,200 s 370,500 189,800 70,000 570,000 199,500 Net income Increase in sales Increase in net income Assets Cash and short-term 25.00% 95% $65,000 70,000 320,000 5,600,000 5,990,000 investments Receivables Inventory Current assets Building and equipment 395,000 6,250,000 6,710,000 956,000 54,000 7,720,000 950,000 60,000 S 7,000,000 ne Other assets Total assets Liabilities and Shareholders' Equity Accounts payable 307,000 Short-term debt payable 90 Taxes payable Current liabilities Long-term debt payable 695 Total liabilities Retained earnings Common stock 130,000 75,000 40,000 245,000 605,000 850,000 550,000 5,600,000 ,000 115,000 512,000 1,207,000 913,000 5,600,000 Total liabilities and shareholders' equity S 7.720,000 7,000,000