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The Mercury Division of Planet Enterprises had pre-tax income of $1,500,000. Total assets were $13,000,000 while current liabilities were $3,000,000. The weighted average cost of capital is 10.0%. The tax rate for Planet Enterprises is 25%
-What is the EVA for the Mercury Division?
A) ($125,000)
B) $125,000
C) $500,000
D) $750,000

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as EVA = NOPAT - (WACC * Capital), where NOPAT is Net Operating Profit After Tax and WACC is the Weighted Average Cost of Capital. First, calculate NOPAT = Pre-tax income * (1 - Tax rate) = $1,500,000 * (1 - 0.25) = $1,125,000. Capital is total assets minus current liabilities = $13,000,000 - $3,000,000 = $10,000,000. Then, EVA = $1,125,000 - (0.10 * $10,000,000) = $1,125,000 - $1,000,000 = $125,000.

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