The division director for Natchez Corporation's Mississippi division, which operates as an investment center, is considering investing in machinery which costs of $2,200,000 and is expected to generate $332,000 in additional operating income.If the division's weighted average cost of capital is 11% and its tax rate is 20%, what is the equipment's EVA?
A)$23,600
B)$90,000
C)$242,000
D)$332,000

Question

Quizplus · Accepted Answer

EVA (Economic Value Added) is calculated as NOPAT (Net Operating Profit After Taxes) minus a charge for the cost of capital employed. NOPAT is calculated as operating income * (1 - tax rate). For this scenario, NOPAT = $332,000 * (1 - 0.20) = $332,000 * 0.80 = $265,600. The charge for the cost of capital is the investment amount ($2,200,000) multiplied by the weighted average cost of capital (11%), which equals $242,000. Therefore, EVA = NOPAT - Cost of Capital Charge = $265,600 - $242,000 = $23,600.

The Division Director for Natchez Corporation's Mississippi Division, Which Operates