Question

Calculating Economic Value Added Barnard Manufacturing earned operating income last year as shown in the following income statement:

Sales	$4,000,000
Cost of goods sold	2,100,000
Gross margin	$1,900,000
Selling and administrative expense	1,100,000
Operating income	$800,000
Less: Income taxes (@ 40%)	320,000
Net income	$480,000

At the beginning of the year, the value of operating assets was $2,700,000. At the end of the year, the value of operating assets was $2,300,000. Total capital employed equaled $1,400,000. Barnard’s actual cost of capital is 12%. Required: Calculate the EVA for Barnard Manufacturing.

Answer 1

EVA for Barnard Manufacturing = NOPAT - ( Total capital employed * WACC )
where, NOPAT = net operating profits after tax = Net income = $480,000
Total capital employed = Total assets - Currents liabilities = Total capital employed = $1,400,000
WACC = Weighted average cost of capital = Actual cost of capital

EVA for Barnard Manufacturing = NOPAT - ( Total capital employed * WACC ) = $480,000 - ( $1,400,000 * 12% ) = $312,000