5) Scranton Shipyards has $11.0 million in total invested operating capital, and its Cost of capital...

5) Scranton Shipyards has $11.0 million in total invested operating capital, and its Cost of capital is 10%. Scranton has the following income statement: Sales $10.0 million (EBIT) $ 4.0 million Interest expense 2.0 million (EBT) $ 2.0 million Taxes (25%) 0.5 million Net income $ 1.5 million What is Scranton’s EVA? Explain what does it mean.

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Expert Solution

Economic Value Added (EVA)= NOPAT – (Invested capital*WACC)

NOPAT= EBIT*(1-T)

Where T= tax rate and WACC = Weighted Average Cost of Capital.

Given,

EBIT= $4 million, Tax Rate (T)= 25%, Invested operating capital= $11 million

and Cost of capital= 10%.

Plugging the inputs,

EVA= $4 million*(1-25%)-($11 million*10%)

=$3 million- $1.1 million = $1.9 million

EVA measures the cash generated by a project (or the firm) by making an investment, and thus whether the that investment is desirable.

jeff jeffy answered 2 years ago

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