Final answer:
Economic Value Added (EVA) is the firm's after-tax earnings minus the dollar cost of capital. For the firm with an average investment of $1,000 and a cost of capital of 10%, the EVA is $50, which is option B.
Step-by-step explanation:
The student's question relates to the calculation of Economic Value Added (EVA). EVA is a measure of a company's financial performance based on the residual wealth calculated by deducting the cost of capital from the company's operating profits, adjusted for taxes on a cash basis. EVA can be calculated using the formula: EVA = net operating profit after taxes (NOPAT) - (invested capital x cost of capital). In this case, the firm has an average investment of $1,000 and after-tax earnings of $150. The cost of capital is 10%.
To calculate the EVA, we first determine the dollar cost of capital which would be the average investment ($1,000) multiplied by the cost of capital (10%), which equals $100. Subtracting this from the after-tax earnings of $150, we arrive at an EVA of $50.
Therefore, the correct answer is: B. $50.