West Division of PoolGuard has invested capital of $900,000.This division incurred $80,000 in interest expense and $20,000 in income tax expense related to interest in July.If this division reported a return on investment of 15 percent, how much is NOPAT?
A)$60,000
B)$75,000
C)$135,000
D)$195,000

Question

Quizplus · Accepted Answer

The formula for calculating NOPAT is:

NOPAT = Net Income - (Interest Expense x (1 - Tax Rate))

Given, 
Investment = $900,000
Interest Expense = $80,000
Tax Expense = $20,000
Return on Investment = 15% = 0.15

We can find the Net Income by using the formula:

Net Income = Investment x ROI

Net Income = $900,000 x 0.15 = $135,000

Now, substituting the values in the formula for NOPAT:

NOPAT = $135,000 - ($80,000 x (1 - 0.2)) = $135,000 - $64,000 = $71,000

Therefore, the correct option is (C) $135,000

West Division of PoolGuard Has Invested Capital of $900,000