Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 38

EVA NOPAT and EVA Capital: Operating Approach You are provided with the following financial statement information from Nimrod, Inc. for its most recent fiscal year.

The statement of income for the company for the year just ended is as follows:

Assume a weighted-average cost of capital (WACC) of 10.7% and an income tax rate of 40%.
Required
1. Prepare, using the operating approach, an estimate of EVA NOPAT. In addition to the above data, you discovered the following: increase during the year of the LIFO reserve, $2; imputed interest expense on noncapitalized leases, $4; and increase in deferred tax liability during the year, $5. (Hint: The correct answer is $53; the amount of cash taxes paid on operating profit during the year is $25.) What is the rationale for the various adjustments you made to the company's reported income statement
2. Prepare, using the operating approach, an estimate of EVA capital. ( Hint: The correct answer is $925.) In addition to the above information, you note the following: end-of-year value of the LIFO reserve, $10; and present value of noncapitalized leases, $50. What is the rationale for the adjustments you made to reported balance sheet amounts in order to estimate EVA capital
3. Given the company's WACC, what is the estimated EVA for the year How do you interpret this figure