Surname 1

 

Name

Instructor

Course

Date

Value Added in Economics

According to (Young n.p), Economic Value added (EVA) is the measure of a firm’s financial performance depending on the residual wealth calculated by subtracting Capital from the operating profit; it is adjusted for taxes on a cash basis. It can either increase the product’s price or value, for instance, providing one-year free training services to members would be a value-added feature.

EVA= (Net investment) x (Actual return on investment-% cost of Capital)

Q1.Assuming each pair (black and red) are given $100 the cost of investment on the pair would be 100×30=3000 if the instructor were willing to offer me $20 for the black one. $20 x30=$ 600 and in the previous case for the black alone $50 x30= $15000 (Young n.p). I would reject the offer since it is lower than the previous one assuming that $50 was for the black alone and the other half for the red that would bring the value higher than the current offer.

Q2. In the case where the instructor has only 27 red cards, and there are still 30 black cards for 30 students (Young n.p). Holding the initial amount of $30 constant the red one will now be $30×27=810 assuming that the three red cards represent the tax deducted the Net Operating Profit after tax will be 1710-(810×0.90)=1710-729=981/27=$36.33 for each black card

%WACC (red alone $30×30=900-810=90/100=0.90), (30×27=810+ 30×30=900) = 1710.

The other formula used is (the size of the pie when you are in the game- the size of the pie when you are out of the game)

Q3 The size of the pie when you are in the game is $3000, and when you are not $0, hence the added value is 0 since the figure is still the same as when you were in the game @$3000.

Q4. When there are 30 black, and 30 red cards for each has an added value of $100= 30x$100=3000 for red and 3000 for black hence it becomes $ 3000 consequently when there are 30 blacks and 27 reds the instructor has an added value of 2,700. The total cost for 30 students is 2,700 and for 27 students is 2,700.

If I enter the game I would add the value of the 30 students since they are more than the 27 students since it will help me determine the amount of wealth within the firm and in real life situations you can see that the 30 students represent an excellent prediction by investors and the future growth and performance will be steady and consistent (Young n.p). This is the perspective that will be used by investors.

 

 

 

 

 

 

 

Works Cited

Young, S. David, et al. EVA and value-based management. McGraw-Hill Professional Publishing, 2010.