Question

Which one of the following is removed from net income when determining NOPAT?

1) Interest expense
2) Tax expense
3) Depreciation expense
4) Operating expenses

Answer 1

Interest expense is removed from net income when determining NOPAT because it is related to financing rather than operations. Tax, depreciation, and operating expenses are considered part of the operational profit and are not removed.

Therefore, option 1 is correct.

Step-by-step explanation:

When determining Net Operating Profit After Tax (NOPAT), the one component that is removed from net income is interest expense. NOPAT is a measure of a company's operational efficiency after accounting for taxes but excluding the costs and benefits of financing with debt. NOPAT is calculated by taking the operating profit (also known as EBIT or earnings before interest and taxes), and adjusting it for taxes as if there were no interest expense, because interest is a financing activity rather than an operating activity.

Therefore, tax expense, depreciation expense, and operating expenses are not removed when calculating NOPAT. These expenses are directly related to the core business activities and are included in the operational profit figure that NOPAT starts with before adjusting for taxes.