Figure 19-3
The following results for the year pertain to the Maddox Division of Ryan Ltd.: $\begin{array}{lr}
\text { Sales } & E 640,000 \
\text { Variable expenses } & 160,000 \
\text { Fixed expenses } & 300,000
\end{array}$ The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent.
-Refer to Figure 19-3. If the total capital employed by the Maddox Division is £800,000, what is the economic value added (EVA)?
A)£12,000
B)£96,000
C)£108,000
D)£180,000

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as EVA = NOPAT - (WACC * Capital Employed), where NOPAT is Net Operating Profit After Taxes, and WACC is the Weighted Average Cost of Capital. First, calculate NOPAT: Sales (£640,000) - Variable Expenses (£160,000) - Fixed Expenses (£300,000) = Operating Income (£180,000). Taxes are 40%, so Tax = £180,000 * 40% = £72,000. NOPAT = Operating Income - Tax = £180,000 - £72,000 = £108,000. Then, calculate the capital charge: WACC (12%) * Capital Employed (£800,000) = £96,000. Finally, EVA = NOPAT - Capital Charge = £108,000 - £96,000 = £12,000.

Figure 19-3 the Following Results for the Year Pertain to the Maddox

Figure 19-3
the Following Results for the Year Pertain to the Maddox