Question

EP Enterprises has the following income statement. How μch Net Operating Profit After Taxes (NOPAT) does the firm have?

Sales $1,800.00

Costs $1,400.00

Depreciation $250.00

Interest Expense $70.00

a) Calculate Earnings Before Interest and Taxes (EBIT).

b) Determine the Net Income.

c) Calculate Taxes (25% of EBT).

d) Calculate NOPAT.

Answer 1

To calculate the Net Operating Profit After Taxes (NOPAT) for EP Enterprises, we must first calculate the Earnings Before Interest and Taxes (EBIT), determine Net Income, figure out taxes at 25% of Earnings Before Taxes (EBT), and then calculate NOPAT. The calculations show that EP Enterprises has a NOPAT of $112.50.

Step-by-step explanation:

The subject of this question is business, more specifically it deals with financial accounting and the calculation of Net Operating Profit After Taxes (NOPAT).

a) Calculate Earnings Before Interest and Taxes (EBIT)

To calculate EBIT, we take Sales and subtract Costs and Depreciation:

EBIT = Sales - Costs - Depreciation

EBIT = $1,800.00 - $1,400.00 - $250.00

EBIT = $150.00

b) Determine the Net Income

To determine Net Income, we subtract Interest Expense from EBIT and then subtract taxes:

Net Income = EBIT - Interest Expense - Taxes

Note: Taxes haven't been calculated yet, so we will return to this after step c.

c) Calculate Taxes (25% of EBT)

Taxes are calculated as 25% of Earnings Before Taxes (EBT), which is EBIT minus Interest Expense:

EBT = EBIT - Interest Expense

EBT = $150.00 - $70.00

EBT = $80.00

Taxes = 0.25 × EBT

Taxes = 0.25 × $80.00

Taxes = $20.00

d) Calculate NOPAT

Finally, to calculate NOPAT, we go back to the Net Income calculation:

Net Income = EBIT - Interest Expense - Taxes

Net Income = $150.00 - $70.00 - $20.00

Net Income = $60.00

Since NOPAT is the Net Income with after-tax Interest Expense added back in:

NOPAT = Net Income + after-tax Interest Expense

After-tax Interest Expense = Interest Expense × (1 - Tax Rate)

After-tax Interest Expense = $70.00 × (1 - 0.25)

After-tax Interest Expense = $70.00 × 0.75

After-tax Interest Expense = $52.50

NOPAT = $60.00 + $52.50

NOPAT = $112.50

Answer 2

a) Earnings Before Interest and Taxes (EBIT) for EP Enterprises is $150.00.

b) Net Income is $80.00.

c) Taxes amount to $20.00, calculated as 25% of Earnings Before Taxes (EBT).

d) The Net Operating Profit After Taxes (NOPAT) for EP Enterprises is $60.00.

Step-by-step explanation:

a) To calculate Earnings Before Interest and Taxes (EBIT), subtract the total costs (including both variable and fixed costs) along with depreciation from the total sales. In this case, EBIT = $1,800.00 (Sales) - $1,400.00 (Costs) - $250.00 (Depreciation) = $150.00.

b) Net Income is derived by subtracting the Interest Expense from EBIT. Thus, Net Income = $150.00 (EBIT) - $70.00 (Interest Expense) = $80.00.

c) Taxes are calculated as 25% of Earnings Before Taxes (EBT). In this scenario, Taxes = 0.25 * $80.00 = $20.00.

d) Net Operating Profit After Taxes (NOPAT) is found by deducting Taxes from Net Income. So, NOPAT = $80.00 (Net Income) - $20.00 (Taxes) = $60.00.

In summary, EP Enterprises has a Net Operating Profit After Taxes (NOPAT) of $60.00. This metric reflects the company's profitability after considering operating costs, depreciation, interest expenses, and taxes. It provides a clearer picture of the firm's operational efficiency by excluding financing and tax-related influences.