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In the problem 33 Stillwater Services page 37 BPP Revison Kit, the problem requires the calculation of EVA. I want to ask why there is a tax adjustment for finance charges that is deducted to calculate NOPAT, despite the fact that tax has been already deducted to calculate NOPAT?
You need NOPAT, ie after tax, but before finance charges. So if you start with prifit after tax and adjust for interest, by adding that back, you will lose tax relief arising from the interest.
Eg
Op Profit 20 – interest 8 – tax @ 30% ie 3.6 = 8.4
NOPAT = 20 less tax @ 30% = 14 or
NOPAT = 8.4 + 8 (1 – 0.3) = 14
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