Scranton Shipyards' Economic Value Added (EVA)

What is Scranton Shipyards' Economic Value Added (EVA)?

How does EVA help assess a company's financial performance?

Answer:

The Economic Value Added (EVA) for Scranton Shipyards is $0.1 million.

Economic Value Added (EVA) is a financial performance measure that determines the value created by a company above its cost of capital. It helps assess how effectively a company utilizes its invested capital to generate profits.

In the given scenario, Scranton Shipyards has a total invested operating capital of $11.0 million and a cost of capital of 10%. The income statement shows that the company generated $4.0 million in operating income (EBIT) and incurred $2.0 million in interest expense. After deducting taxes of $0.8 million, Scranton Shipyards had a net income of $1.2 million.

To calculate EVA, we subtract the cost of capital from the net operating profit after taxes (NOPAT). The cost of capital is 10% of the total invested operating capital, which is $1.1 million ($11.0 million * 10%).

EVA = NOPAT - Cost of Capital

EVA = $1.2 million - $1.1 million

EVA = $0.1 million

Therefore, Scranton Shipyards' Economic Value Added (EVA) is $0.1 million, indicating that the company generated $0.1 million in value above its cost of capital.