eva calculation …

I don’t know what approach Kaplan uses so it’s hard for me to comment.

Both should come to the same answer. Probably they differ on where they start. You can either start with profit after tax and work back to NOPAT (eg adjusting for interest) or you can start with profit before interest and work forward to NOPAT.

Learn one way and stick to it.

Op profit = 1000, interest = 200, tax rate = 25%

Profit after tax = 1000 – 200 – 0.25(1000 – 200) = 600

Kaplan method for NOPAT = 600 + 200 x 0.75 = 750

Examiner method = 1000 – 1000 x 25% = 750

EVA must use opening CE: that’s how it is defined. Ordinary ROCE using financial statements would usually use the profit for the period and the capital employed on the balance sheet ads at the date of the FS – ie closing CE.

They won’t reconcile in this case because unusually the tax is not 25% of PBT – ie 25% x 45 = 11.25, not 9 or 9.5.

Many thanks Mr Gromit.

Many thanks Glorysuper.

The R&D has not been calitalised so it must have been written off. For EVA and expensed R&D has to be added back to P&L as it’s supposed to be treated as an investmenr., and that is what’s done in the answer

1 “….a new project that will be developed over 5 years…” ie they will be spending on if for 5 years. You have no information about how long the benefit will last.

Besides

2 Economic depreciation not book depreciation is to be used in EVA.

Hi

With regards to question Metis from June 2012, it starts with net profit and loss before tax and interest, then it deducts the tax from the figure to get to NOPAT, but does not take account of the interest.

However with Dec 2014 question 1, the EVA calculation starts with operating profit less tax and less tax benefit of interest.

Why are these done differently?

Also the tax figures seem different for example in Metis the tax is calculated on the net profit and loss ( x 30%) whereas Dec 2014 qu1 the tax is the figure in the financial statements.

Thank you
Jemma

Thank you…. I have looked at other EVA calculations, I am slightly confused however with Dec 2014, the examiners answer is:

Operating profit $2907
less tax charge ($ 663) this is the figure in the statement
less interest tax benefit ($81)

NOPAT $2163

With this question I can understand working from PAT but not from Operating profit, is it because they use the tax figure from the statement which includes the interest as well? and could we use operating profit – 28% for tax?

Thanks
Jemma

Why is that in some questions non cash expenses are added back to capital employed whereas in some they are not

thank you

Dear Sir, well understood why R&D costs are added up on adjusted profit. but why is there no adjustment of capital employed ? if i understand well, we either consider as costs or asset -> here asset, then should we consider R&D investment as adjusted capital employed ?
thank you for your help.

thanks for your answer but still a bit unclear – should we translate into accounting terms (although the intention is to measure economic terms) – if we do not debit expenses, then we debit asset which would impact CE – isn’t ? Can we just ignore R&D investment on B/S despite we consider this will generate future benefits ?