1. A firm produces $65 million of net income on $2,030 million of assets. Given that investors expect a 5 percent return, what is the EVA? Answer: -$36.5 million.2. A firm produces $124 million of net income on $1,600 million of assets. Through a six-sigma project, the firm is able to decrease the assets employed to $1,450 million. Given a 5 percent cost of capital, what is the increase in the EVA? Answer: $7.5 million

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1. A firm produces $65 million of net income on $2,030 million of assets. Given that investors expect a 5 percent return, what is the EVA? Answer: -$36.5 million

2. A firm produces $124 million of net income on $1,600 million of assets. Through a six-sigma project, the firm is able to decrease the assets employed to $1,450 million. Given a 5 percent cost of capital, what is the increase in the EVA? Answer: $7.5 million

EXPERT ANSWER

1—– Economic value added [EVA] = NOPAT – [Capital invested * rate of return]

NOPAT = Net operating profit after tax = $65 million

Capital invested =2030

Rate of return =5%

Economic value added [EVA] = 65-[2030*5%] = 65-101.50 = -36.50

Economic value added [EVA] = -36.50

2—– Economic value added [EVA] = NOPAT – [Capital invested * rate of return]

NOPAT = Net operating profit after tax = $124

Existing Capital invested =1600

Rate of return =5%

Existing Economic value added [EVA] = 124-[1600*5%] = 124-80 = 44

New Capital invested =1450

New Economic value added [EVA] = 124-[1450*5%] = 124-80 = 51.50

Increase in the EVA = New Economic value added [EVA]- Existing Economic value added [EVA] 51.50-44 = 7.50