Question

Casey Motors recently reported the following information: . .

A.Net income = $750,000.
B.Tax rate = 40%.
C.Interest expense $200,000.
D.Total invested capital employed = $9 million.
E.After-tax cost of capital = 10%.
What is the company's EVA?
a. -$30,000
b. -$32,100
C. -$29,400
d. -$34,500
e. -$35,100

Answer 1

EVA is calculated by subtracting the cost of capital from NOPAT. Using provided financials, the EVA for Casey Motors is -$450,000, which does not match the given options, indicating potential missing information or context in the question.

Step-by-step explanation:

The student is asking about the calculation of Economic Value Added (EVA), which is a measure of a company's financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit, adjusted for taxes on a cash basis. To calculate the EVA for Casey Motors, we need to follow these steps:

1. Calculate the net operating profit after taxes (NOPAT) by subtracting the taxes from the net income. NOPAT = Net Income * (1 - Tax Rate) = $750,000 * (1 - 0.40) = $450,000.
2. Calculate the cost of capital, which is the total invested capital multiplied by the after-tax cost of capital. Cost of Capital = Total Invested Capital * After-Tax Cost of Capital = $9,000,000 * 10% = $900,000.
3. Subtract the cost of capital from the NOPAT to determine the EVA. EVA = NOPAT - Cost of Capital = $450,000 - $900,000 = -$450,000.

However, there seems to be a discrepancy between the calculated EVA and the options provided, which suggests that there might be additional context or information missing from the question as presented.