A firm produces $124 million of net income on $1,600 million of assets. Through a six sigma project, the firm is able to the assets employed to $1,450 million. Given a 5% cost of capital, what is the increase in the EVA?
A) $7.5 million
B) $44.0 million
C) $51.5 million
D) $96.5 million

Question

Quizplus · Accepted Answer

The Economic Value Added (EVA) is calculated as Net Income - (Cost of Capital * Assets). Initially, EVA = $124 million - (0.05 * $1,600 million) = $44 million. After the project, EVA = $124 million - (0.05 * $1,450 million) = $51.5 million. The increase in EVA is $51.5 million - $44 million = $7.5 million.

A Firm Produces $124 Million of Net Income on $1,600