Question

Casey Motors recently reported the following information:

Answer 1

Company's Economic value added amount is (-$275,000)

Let understand that Economic Value Added is basically, an estimate of the company's economic profit

• The formulae for deriving Economic Value Added = $NOPAT - {Cost of Capital * Capital employed}$

Let understand that NOPAT means Net operating profit after tax. NOPAT = EBIT (1 - Tax)

Suppose EBIT = x

EBIT - Interest - Tax = Net Income

(x - 200,000) -  0.25*(x - 200000) = 475,000

x - 200,000 = 475,000/0.75

x = 833333.33

Now, EBIT = $833,333.33

Then we calculate NOPAT = EBIT (1 - Tax)

NOPAT = 833,333.33 * (1 - 0.25)

NOPAT = $625,000

Then, we calculate Economic Value Added

EVA = $625,000 - 0.10*$9,00,0000

EVA = $625,000 - $900,000

EVA = ($275,000)

In conclusion, the amount of the Company's Economic value added is a negative of $275,000.

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