People's Construction Company has set a 15% required minimum rate of return.The company's CFO is considering investing in a $125,000 crane that is expected to generate $25,000 of additional operating income.People's weighted-average cost of capital is 10% and its tax rate is 30%.What is the crane's EVA?
A)$5,000
B)$12,500
C)$17,500
D)$100,000

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as NOPAT (Net Operating Profit After Taxes) minus a charge for the opportunity cost of capital invested. NOPAT is calculated as operating income * (1 - tax rate). For the crane, NOPAT = $25,000 * (1 - 0.30) = $17,500. The capital charge is the investment amount ($125,000) multiplied by the required rate of return (15%), which equals $18,750. Therefore, EVA = $17,500 - $18,750 = -$1,250. However, none of the options match this calculation directly, suggesting a possible misunderstanding in the calculation or the provided options. Given the options, the closest match or intended answer might be misunderstood due to a calculation error. Re-evaluating the calculation process or the interpretation of the question's details is necessary.

People's Construction Company Has Set a 15% Required Minimum Rate