Final answer:
The Correct option is 3). In EVA, the term 'net' in NOPAT signifies that it takes into account after-tax effects. NOPAT provides a clear view of operational profitability by excluding financing costs and non-operating incomes, highlighting the company's core business efficiency.
Step-by-step explanation:
One of the components of Economic Value Added (EVA) is NOPAT (net operating profit after tax). In this specification, the word "net" is used because it considers after-tax effects. This means that NOPAT is calculated by taking a company's operating profits and subtracting taxes, to reflect the actual profit generated from the company's core business operations after fulfilling tax obligations. The term 'net' suggests that this measure has accounted for all relevant taxes, contrasting with 'gross' which would indicate a figure prior to such considerations.
NOPAT is an essential element of the EVA calculation because it provides a clear picture of a company's profitability after taxes but before financing costs and non-operating income. It serves as a measure of the efficiency of a company's operations. Comparing NOPAT with accounting profit, the latter represents total revenue minus explicit costs, or the cash basis profit of a business. In contrast, economic profit includes both explicit and implicit costs. In accounting, it is generally accepted that profit evaluations for tax purposes are based on accounting profit, but the economic success of a business is often gauged by its economic profit.