In EVA, what is the capital charge subtracted from NOPAT?

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Multiple Choice

In EVA, what is the capital charge subtracted from NOPAT?

Explanation:
EVA measures value by subtracting the cost of capital from NOPAT. The amount you subtract—the capital charge—equals invested capital multiplied by the weighted average cost of capital (WACC). So, EVA = NOPAT − (Invested capital × WACC). This makes the product of invested capital and WACC the correct capital charge to subtract from NOPAT. NOPAT is the after-tax operating profit, not the charge itself; gross margin and operating income are other profitability measures and don’t represent the capital cost being allocated to returns.

EVA measures value by subtracting the cost of capital from NOPAT. The amount you subtract—the capital charge—equals invested capital multiplied by the weighted average cost of capital (WACC). So, EVA = NOPAT − (Invested capital × WACC). This makes the product of invested capital and WACC the correct capital charge to subtract from NOPAT. NOPAT is the after-tax operating profit, not the charge itself; gross margin and operating income are other profitability measures and don’t represent the capital cost being allocated to returns.

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