Compute the May 20xx EVA for an investment center with the following information: $\begin{array}{|l|l|}
\hline \text { Pre-tax operating income for May } 20 \mathrm{xx} & 18,000,500 \
\hline \text { Income tax expense for May 20xx } & 5,100,000 \
\hline \text { Assets at May 31,20kx } & 13,200,500 \
\hline \text { Current liabilities at May } 31,20 \mathrm{kx} & 10,000,000 \
\hline \text { Long term liabilities at May } 31,20 \mathrm{kx} & 3,500,000 \
\hline \text { Minimum desired rate of return } & 20 \% \
\hline
\end{array}$
Minimum desired rate of return 20%

Question

Compute the May 20xx EVA for an investment center with the following information: $\begin{array}{|l|l|}
\hline \text { Pre-tax operating income for May } 20 \mathrm{xx} & 18,000,500 \
\hline \text { Income tax expense for May 20xx } & 5,100,000 \
\hline \text { Assets at May 31,20kx } & 13,200,500 \
\hline \text { Current liabilities at May } 31,20 \mathrm{kx} & 10,000,000 \
\hline \text { Long term liabilities at May } 31,20 \mathrm{kx} & 3,500,000 \
\hline \text { Minimum desired rate of return } & 20 \% \
\hline
\end{array}$
 Minimum desired rate of return 20%

Quizplus · Accepted Answer

EVA = (NOPAT - (Asset * WACC))NOPAT = Pre-tax operating income - Income tax expenseNOPAT = 18,000,500 - 5,100,000 = 12,900,500WACC = (E/V * Re) + ((D/V) * Rd * (1 - T))E = Assets - Current liabilities - Long term liabilities = 13,200,500 - 10,000,000 - 3,500,000 = -300,000V = Assets = 13,200,500D = Current liabilities + Long term liabilities = 10,000,000 + 3,500,000 = 13,500,000Re = Minimum desired rate of return = 20%Rd = 10% (assumed)T = Income tax rate = 5,100,000 / 18,000,500 = 28.33%WACC = (-300,000/13,200,500 * 20%) + ((13,500,000/13,200,500) * 10% * (1 - 28.33%))WACC = -0.4545% + 0.7965% = 0.342%EVA = (12,900,500 - (13,200,500 * 0.342%)) = 12,260,400

Compute the May 20xx EVA for an Investment Center with the Following