Final answer:
To calculate the Economic Value Added (EVA), subtract the tax expense from the profit after tax, calculate the cost of capital (WACC), and use the formula (Net Operating Profit After Taxes - Cost of Capital) x Capital Employed. The EVA for Uwezo Ltd is Kshs. 5,800,000,000.
Step-by-step explanation:
Economic Value Added (EVA) is a measure of a firm's financial performance that calculates the difference between its net operating profit after taxes (NOPAT) and the cost of capital. To calculate EVA, we need to determine the firm's net operating profit after taxes, which is calculated by subtracting the tax expense from the firm's profit after tax. In this case, the profit after tax is Kshs. 120,000,000 and the tax rate is 40%, so the tax expense will be Kshs. 48,000,000 (Kshs. 120,000,000 x 40%). Therefore, the net operating profit after taxes is Kshs. 72,000,000 (Kshs. 120,000,000 - Kshs. 48,000,000).
Next, we need to calculate the cost of capital, also known as the weighted average cost of capital (WACC), which is the average rate of return required by the firm's investors. In this case, the WACC is given as 14%.
Finally, we can calculate the Economic Value Added (EVA) by subtracting the cost of capital from the net operating profit after taxes and multiplying the result by the capital employed. The formula for EVA is:
EVA = (Net Operating Profit After Taxes - Cost of Capital) x Capital Employed
Using the given values, the calculation would be:
EVA = (Kshs. 72,000,000 - 0.14 x Kshs. 100,000,000) x Kshs. 100,000,000
EVA = (Kshs. 72,000,000 - Kshs. 14,000,000) x Kshs. 100,000,000
EVA = Kshs. 58,000,000 x Kshs. 100,000,000
EVA = Kshs. 5,800,000,000