Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 48

EVA® NOPAT and EVA® Capital: Financing Approach Refer to the preceding problem for reported financial statement data for Astro, Inc.

Required

1. Prepare, using the financing approach, an estimate of EVA® NOPAT. In addition to the above data, you’ve discovered the following: increase during the year of the LIFO reserve, $2; imputed interest expense on noncapitalized leases, $4; and increase in deferred tax liability during the year, $5. (Hint: The correct answer is $53.) What is the rationale for the various adjustments you made to the company’s reported income statement?

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2. Prepare, using the financing approach, an estimate of EVA® capital. (Hint: The correct answer is $925.) In addition to the above information, you note the following: end-of-year value of the LIFO reserve, $10; and present value of noncapitalized leases, $50. What is the rationale for the adjustments you made to reported balance sheet amounts in order to estimate EVA® capital?

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3. Given the company’s WACC, what is the estimated EVA® for the year? How do you interpret this figure?

Step 1 of 11

EVA:

Economic Value Added helps in measuring the value added of the capital. The value added is calculated on the capital or fund invested into the company.