Question

Sanchez Company reports the following information: Net operating profit after taxes $500,000 Adjusted net operating profit after taxes $670,000 Average invested capital $500,000 Adjusted average invested capital $700,000 After-tax cost of capital 10% The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Sanchez Company? A) $430,000 B) $450,000 C) $600,000 D) $620,000

Answer 1

The correct answer is option (C).

Step-by-step explanation:

According to the scenario, the given data are as follows:

Net operating profit after taxes = $500,000

Adjusted net operating profit after taxes = $670,000

Average invested capital = $500,000

Adjusted average invested capital = $700,000

After tax cost of capital = 10%

So, we can calculate the EVA by using following formula:

EVA = Adjusted net operating profit after taxes - Cost of capital

Where, Cost of capital = Adjusted average invested capital ×After tax cost of capital

= $700,000 × 10%

=$70,000

So, by putting the value, we get

EVA = $670,000 - $70,000

= $600,000.