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Hi Sir..
I have been brushing up my knowledge of EVA… and came across this questions.
It might be a silly one.. but could you share some light on my confusion?
Question-
M Ltd had profits of $90m for the current year after charging for development costs of
$8 million. The new product is expected to last for five years, including the current year.
The cost of capital is 10% per annum. Non-current assets have a historical cost of $120m and a replacement cost of $150m. They have been depreciated at 12% per annum. The company has working capital of $25m.
Ignoring taxation, what is the Economic Value Added® of M Ltd in $ million, to 2 decimal placesAnswer:
Eva= NOPAT- Capital Charge
NOPAT
Profit= 90m
less tax = 0
Add historic depreciation= 12% * 120m= 14.40
Add development costs= 8m*1/5= 1.6
Less Depreciation= 150*12%= (18.00)
NOPAT= 88now the answer says NOPAT should be 92.80 and when it calculates the development costs it takes 4/5 th OF 8M…What am I missing here.. where is the question does it hint we are in the 4th year out of 5?
Currently all $8m of development has been deducted from profit. 4/5 of that has to be added back so that only one year of amortisation is charged.
Thanks..
I have seen a similar question and the confusion still appears.
R LTD had profit of $115m for the current year after charging lease charges of $6 million and advertising costs of $4 million for a new product. The new product was launched at the end of the current year and is expected to be on the market for five years. The cost of capital is 8% per annum. Non-current assets have a historical cost of $160m and a replacement cost of $200m. They have been depreciated at 10% per annum. The company has working capital of $22m.
Ignoring taxation, what is the Economic Value Added® of R Ltd in $ million, to 2 decimal places?
The question is very similar to the question above, instead of development costs we have advertising and lease charges.
NOPAT
Profit= 115m
less tax = o
Add back advertising costs= 4m*4/5th= 3.2
add back leases =6m
add historic deprecation= (16)
less economic depreciation= (20)
total =120.2my advertising costs figure is wrong- but I thought as you said before.. that all 4m of the advertising costs has been deducted from profit. so similar to above 4/5th of that has to be added back to that one year of ammortisation is charged? Advertising and development costs can be ammortised right?
Advertising and R&D costs are generally treated the same way. See:
I don’t know why the treatment is different here.
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