NOPAT is used for 'income' in the return on investment formula because
A)investment center managers should not be evaluated based on long-term financing decisions since they do not have responsibility for making those decisions.
B)NOPAT represents the return to stockholders, and divisions are free to issue stock.
C)NOPAT represents the return to debt capital, and division managers generally are free to issue debt needed to acquire new investments.
D)All of these answer choices are correct.

Question

Quizplus · Accepted Answer

NOPAT (Net Operating Profit After Taxes) is used in the return on investment formula because it isolates the profits generated from operations, excluding the effects of financing and investing decisions. This is appropriate since investment center managers are typically not responsible for financing decisions, such as issuing debt or equity, which are usually made at the corporate level. Therefore, evaluating them based on NOPAT allows for a focus on the operational efficiency and profitability under their control.

NOPAT Is Used for 'Income' in the Return on Investment