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5 June, 03:39

Sanchez Company reports the following information: Net operating profit after taxes $500,000 Adjusted net operating profit after taxes $670,000 Average invested capital $500,000 Adjusted average invested capital $700,000 After-tax cost of capital 10% The adjusted figures reflect adjustments used by Stern Stewart & Company. What is the EVA for Sanchez Company? A) $430,000 B) $450,000 C) $600,000 D) $620,000

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  1. 5 June, 07:38
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    The correct answer is option (C).

    Explanation:

    According to the scenario, the given data are as follows:

    Net operating profit after taxes = $500,000

    Adjusted net operating profit after taxes = $670,000

    Average invested capital = $500,000

    Adjusted average invested capital = $700,000

    After tax cost of capital = 10%

    So, we can calculate the EVA by using following formula:

    EVA = Adjusted net operating profit after taxes - Cost of capital

    Where, Cost of capital = Adjusted average invested capital * After tax cost of capital

    = $700,000 * 10%

    =$70,000

    So, by putting the value, we get

    EVA = $670,000 - $70,000

    = $600,000.
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