Cole Harbour Silver Ltd. (CHS) was formed by a hockey player to sell engraved silver teacups. CHS is capitalized by $4 million in shares and $1 million in bonds. It will use all that money to buy assets with a five-year economic life and use straight-line depreciation. EBIT is expected to be $500,000 per year. Taxes are $100,000 per year. After five years the firm will be wound up and the capital assets will have no residual value. Investors require a 16% return on investment.
Required:
(a) Use the shareholder value analysis (SVA) approach to calculate shareholder value.
(b) Use the economic value added (EVA) approach to calculate shareholder value.
(c) How do the final results of the two approaches compare?