Calculating Scranton Shipyards' Economic Value Added (EVA)
What is Scranton Shipyards' Economic Value Added (EVA)?
Answer:
Scranton Shipyards' Economic Value Added (EVA) is -$2,120,000.
Calculating Scranton Shipyards' Economic Value Added (EVA)
Explanation: To calculate Scranton Shipyards' Economic Value Added (EVA), we need to determine its Net Operating Profit After Taxes (NOPAT) and its Cost of Capital.
Given information:
Total Net Operating Capital: $21 million
WACC (Weighted Average Cost of Capital): 12%
From the income statement, we can find the Net Income, which is $1.2 million. However, we need to calculate the NOPAT by subtracting the taxes from the Net Income. Since the tax rate is 40%, the taxes amount to $0.8 million.
Now, we can calculate the NOPAT:
NOPAT = Net Income - Taxes = $1.2 million - $0.8 million = $0.4 million
Next, we need to calculate the Cost of Capital. The formula for Cost of Capital is:
Cost of Capital = Total Net Operating Capital x WACC
Plugging in the values:
Cost of Capital = $21 million x 0.12 = $2.52 million
Finally, we can calculate the Economic Value Added (EVA) using the formula:
EVA = NOPAT - Cost of Capital
EVA = $0.4 million - $2.52 million = -$2.12 million
Since the EVA is negative, we represent it as -2,120,000.