US CMA Part 1 · Chapter 3 · Question 25 of 30
A business unit has operating income (EBIT) of $1,200,000 and a tax rate of 25%. Its total assets are $8,000,000 and current liabilities are $1,500,000. The weighted average cost of capital is 10%. What is economic value added (EVA)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $250,000
Explanation
NOPAT = $1,200,000 x (1 - 25%) = $900,000. Invested capital = total assets - current liabilities = $8,000,000 - $1,500,000 = $6,500,000. Capital charge = 10% x $6,500,000 = $650,000. EVA = $900,000 - $650,000 = $250,000.
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