Question

Testbank, Question 63

The Grisham Company has reported the following information for 2012:

Net operating income after tax (NOPAT) $1,200,000
Invested capital $7,500,000
Current liabilities $980,000
Weighted average cost of capital 16%

The company’s economic value added is:

$156,800

$220,000

$1,008,000

$851,200

Answer 1

Determination of the Economic Value Added : Economic Value Added is a used measure of profitability of the projects undertaken. It gives the measure of how much wealth is created over and above the capital by undertaking the projects. Formula for the Calculation of the EVA: EVA = Net Operating Income after Tax (NOPAT)-[Weighted Average Cost of Capital (WACC) * Capital Employed] $ 1,200,000 16% NOPAT = WACC = Capital Employed Invested Capital: Current Liabilities: Total $ $ $ 7,500,000 (980,000) 6,520,000 Economic Value Added (EVA) = $ 1,200,000 - ($ 6,520,000 * 16%) Economic Value Added (EVA) = $ 1,200,000 - $ 1,043,200 Economic Value Added (EVA) = $ 156,800 Therefore, the Answer is OPTION A