A firm has an average investment of $10,000 during the year. During the same period, the firm generates after-tax income of $1,000.
Calculate the economic value added (EVA)for the firm. (The cost of capital is 15 percent.)
A)−$500
B)$1,500
C)$1,200
D)$1,000

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as EVA = NOPAT - (WACC * Capital), where NOPAT is net operating profit after tax, WACC is the weighted average cost of capital, and Capital is the amount of capital invested. In this case, NOPAT is $1,000, WACC is 15%, and Capital is $10,000. Thus, EVA = $1,000 - (0.15 * $10,000) = $1,000 - $1,500 = -$500.

A Firm Has an Average Investment of $10,000 During the Year