Question

Assume an organization's cost of capital is 10% and Division X has operating income of $3 million and uses $20 million of capital. The economic value added for Division X is: a. $200,000. b. $300,000. c. $1,000,000. d. $1,700,000.

Answer 1

c. $1,000,000

Step-by-step explanation:

The computation of the economic value added is shown below:

Economic value added = Operating income - total invested capital × WACC

= $3,000,000 - $20,000,000 × 10%

= $3,000,000 - $2,000,000

= $1,000,000

We simply deduct the total invested capital by multiplying the cost of capital from the operating income