Diablo Corporation's Western region operates as an investment center.John Mosby, the division's director, is considering investing in manufacturing equipment with a cost of $120,000.The equipment is expected to generate $35,000 in additional net operating profit.If the weighted average cost of capital is 18%, what is the equipment's EVA?

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as Net Operating Profit After Taxes (NOPAT) minus the capital charge. The capital charge is the cost of capital multiplied by the investment. Here, EVA = $35,000 - ($120,000 * 18%) = $35,000 - $21,600 = $13,400.

Diablo Corporation's Western Region Operates as an Investment Center