Part 3. Economic Value Added. Boston Shipyards has $20 million in total investor

Question

Part 3. Economic Value Added. Boston Shipyards has $20 million in total investor-supplied operating capital, its weighted average cost of capital (WACC) is 10%, and its most recent income statement is shown below.

(A) Determine Boston’s EVA. Show your work. Check figure: EVA = $400,000. Sales $10.0 million Operating costs -6.0 million Operating income (EBIT) $ 4.0 million Interest expense -2.0 million Earnings before taxes (EBT) $ 2.0 million Taxes (40%) -0.8 million Net income $ 1.2 million

(B) As a measure of performance for a division manager, which should be better, EVA or MVA? Explain why.

Explanation / Answer

EVA= NOPAT-cost of capital employed

NOPAT= EBIT*(1-t)=4000000*(1-0.4)=4000000*0.6= 2400000

cost of capital employed= Operating capital*wacc=20000000*10%=2000000

EVA= 2400000-2000000 =400000

B. Market Value Added.

EVA measures the current earning efficiency of the company, while MVA takes into consideration the EVA from not only the assets in place but also from the Future activities of the company.

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