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.