A firm produces $124 million of net income on $1,600 million of assets.Through a six-sigma project,the firm is able to decrease the assets employed to $1,450 million.Given a 5% cost of capital,what is the increase in the EVA?

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