A firm has an average investment of $100,000 during the year. During the same period, the firm generates an after-tax income of $16,000. If the cost of capital is 15 percent, what is the EVA?
A)+$16,000
B)+$15,000
C)+$1,000
D)−$1,000

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as the net operating profit after taxes (NOPAT) minus the capital charge. The capital charge is the cost of capital times the average investment. Here, the capital charge is 15% of $100,000, which equals $15,000. The NOPAT is given as $16,000. Therefore, EVA = $16,000 - $15,000 = $1,000.

A Firm Has an Average Investment of $100,000 During the Year