Problem: EVA at Briggs & Stratton
Briggs & Stratton Corporation is the world’s largest maker of air-cooled gasoline engines for outdoor power equipment. The company’s engines are used by the lawn and garden equipment industry. According to the company’s annual report, the “ management subscribes to the premise that the value of Briggs & Stratton is enhanced if the capital invested in its operations yields a cash return that is greater than that expected by the providers of capital”.
The following data are for Briggs & Stratton’s 2008 annual report with operating profit and average capital adjusted to reflect the capitalization of R & D and the use of FIFO inventories (thousands of dollars).
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2007
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2008
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Adjusted before tax operating profit
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$ 71,460
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$52,190
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Cash taxes
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10,853
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30,424
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Adjusted average invested capital
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1,687,082
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1,652,321
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Cost of capital
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9.4%
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9.9%
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1. Compute the EVA for Briggs & Stratton for 2007 and 2008
2. Did Briggs & Stratton’s overall performance improve from 2007 to 2008? Explain.