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 percent cost of capital, what is the increase in the EVA?

Question

Quizplus · Accepted Answer

The increase in EVA (Economic Value Added) is calculated by first determining the EVA before and after the six-sigma project. EVA is calculated as EVA = NOPAT - (WACC * Capital), where NOPAT is net operating profit after taxes (which can be approximated by net income for this question), WACC is the weighted average cost of capital, and Capital is the total assets employed.Before the project:- NOPAT = $124 million- WACC = 5% or 0.05- Capital = $1,600 millionEVA before = $124 million - (0.05 * $1,600 million) = $124 million - $80 million = $44 millionAfter the project:- NOPAT = $124 million (unchanged)- WACC = 5% or 0.05- Capital = $1,450 millionEVA after = $124 million - (0.05 * $1,450 million) = $124 million - $72.5 million = $51.5 millionIncrease in EVA = EVA after - EVA before = $51.5 million - $44 million = $7.5 million

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