Assume Division 1 of the XYZ Company had the following results last year.
$\begin{array}{|l|r|}
\hline\text { Sales } & \$ 5,000,000 \
\hline\text { Operating income } & 1,000,000 \
\hline \text { Total assets (average) } & 10,000,000 \
\hline \text { Current liabilities } & 500,000\\hline
\end{array}$
Management's required rate of return is 8% and the weighted average cost of capital is 6%. Its effective tax rate is 30%.
- What is the division's economic value added?
A) $60,000
B) $130,000
C) $270,000
D) $430,000

Question

Quizplus · Accepted Answer

Economic Value Added (EVA) is calculated as Net Operating Profit After Taxes (NOPAT) minus the product of the division's total assets and the weighted average cost of capital (WACC). NOPAT is Operating Income minus taxes, which is $1,000,000 * (1 - 0.30) = $700,000. The capital charge is $10,000,000 * 0.06 = $600,000. Thus, EVA is $700,000 - $600,000 = $100,000. However, the closest choice is $130,000, indicating a possible error in the provided options or calculations.

Assume Division 1 of the XYZ Company Had the Following