Jumbo Industries is considering the purchase of equipment costing $80,000.The company has a 12% required minimum rate of return.The equipment is expected to generate $20,000 in additional operating income.Jumbo's tax rate is 25% and its weighted-average cost of capital is 12%.What is the equipment's EVA?
A)$2,400
B)$5,400
C)$7,200
D)$9,600

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as NOPAT - (Capital * Cost of Capital), where NOPAT is Net Operating Profit After Tax. First, calculate NOPAT: $20,000 in additional operating income less 25% tax gives $15,000. Then, calculate the capital charge: $80,000 * 12% = $9,600. Finally, subtract the capital charge from NOPAT: $15,000 - $9,600 = $5,400.

Jumbo Industries Is Considering the Purchase of Equipment Costing $80,000