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Dear Sir,
In part b, estimate the EVA, i have some questions:
– The interest expense is added back to NOPAT but why isn’t it adjusted to the capital employed?
– Lease charges are not adjust to NOPAT but why is it added back to CE?Thanks,
KTCE is at the start of the year so interest for the year is not relevant.
A non-capitalised lease should be recognised as an asset (as though owned or a finance lease).
In NOPAT, the amount debited will have been only the operating lease rental payments, not the capital value of the finance lease. Strictly, you should add back the lease payment of the operating lease to the NOPAT figure (less tax relief). If this figure isn’t given you can’t make that adjustment
Hi Ken,
For this lease, I am a bit confused. I understand the figure of 16m was not recorded in both PL and BS so we have to add back this 16m to the capital employed. Is it correct?
For the NOPAT, the depreciation (under Finance lease) is not given. If in the exam i assume the economic depreciation to be equal to 16m and add it to the NOPAT, is it ok? and could i get mark for this question?
THanks,
DTYes. $16m has to be added back to CE.
You are told that the non-capitalised leases are not subject to depreciation. Later you are told that economic depreciatin is equal to book depreciation. Therefore, no net adjustment for depreciatoin is needed.
Hi Ken,
Sorry i still can not understand this non-capital leases. Below is the questions:
– I agree when economic depreciation is equal to depreciation in the income statements, we don’t need to make any adjustment to the NOPAT however is there any example for lease in real life that is not subject to amortisation?
– In the question, we know the leases valued at $16m in each of the years 20×5 to 20×7. So under the finance lease accounting the value of this lease asset should be 48m (16m x 3 years) by early 20×5, 32m by early 20×6 and 16m by early 20×7. So when i calculate EVA for this question, I will adjust add 32m to capital employed of 20×6 and 16m to CE of 20×7. This is different from the solution in the revision kit. Please help to explain why they add 16m in 20×6 and 20×7 when they calculate the CE.Thanks,
DT
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