Marcia Consumer Products has several divisions, including the Education Division and the Recreation Division. Data on the two divisions are shown here:
$\begin{array}{|l|r|r|}
\hline & \text { Education Division } & \text { Recreation Division } \
\hline \text { Current ROI } & 9.2 \% & 10.0 \% \
\hline \text { Current WACC } & 8.0 \% & 8.0 \% \
\hline \text { Operating income } & \$ 110,000 & \$ 200,000 \
\hline \text { Effective tax rate } & 20.0 \% & 20.0 \% \
\hline \text { Average total assets } & \$ 1,200,00 & \$ 2,000,000 \
\hline \text { Current liabilities } & \$ 30,000 & \$ 30,000\\hline
\end{array}$
How much is the EVA for the Recreation Division?
A) $1,890
B) $2,400
C) ($1,300)
D) ($2,950)

Question

Marcia Consumer Products has several divisions, including the Education Division and the Recreation Division. Data on the two divisions are shown here:
$\begin{array}{|l|r|r|} 
\hline & \text { Education Division } & \text { Recreation Division } \
\hline \text { Current ROI } & 9.2 \% & 10.0 \% \
\hline \text { Current WACC } & 8.0 \% & 8.0 \% \
\hline \text { Operating income } & \$ 110,000 & \$ 200,000 \
\hline \text { Effective tax rate } & 20.0 \% & 20.0 \% \
\hline \text { Average total assets } & \$ 1,200,00 & \$ 2,000,000 \
\hline \text { Current liabilities } & \$ 30,000 & \$ 30,000\\hline 
\end{array}$
How much is the EVA for the Recreation Division?
A) $1,890
B) $2,400
C) ($1,300)
D) ($2,950)

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as: $$EVA = NOPAT - (WACC \times Capital)$$Where NOPAT (Net Operating Profit After Taxes) = Operating Income \times (1 - Tax Rate), and Capital = Average Total Assets - Current Liabilities.For the Recreation Division:- NOPAT = $200,000 \times (1 - 0.20) = $160,000- Capital = $2,000,000 - $30,000 = $1,970,000- EVA = $160,000 - (0.08 \times $1,970,000) = $160,000 - $157,600 = $2,400Therefore, the EVA for the Recreation Division is $2,400.

Marcia Consumer Products Has Several Divisions, Including the Education Division