Win Tech Motors Case

In 2013, five retired software developers opened an auto dealership in Redmond, Washington, which they named WinTechMotors.

The company specialized 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, and the Company

has shipped cars to Web customers as far away as Florida, although most customers are located in Washington, Oregon

and California. Comparative income statements and balance sheets are presented in the next tab. As indicated, the company

has sales of $15,120,000 in 2014 (a 25 percent increase over 2013) and net income of $326,950 (a 91 % increase over 2013).

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 12 percent, their EVA had been negative in both years. Accordingly, the

owners have contracted with an EVA consultant to help them with financial planning.

Required

a. Calculate EVA for 2014 and 2013 using a cost of capital of 12%. No adjustments for accounting distortions are needed.

Explain why sales and income have increased substantially in 2014 and yet EVA is negative. What is not captured

in income that is captured in EVA?