Question

Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year's results: Adams Division Jefferson Division Net (after-tax) income $ 605,000 $ 315,000 Total capital employed 4,000,000 3,250,000 Washington's actual cost of capital was 12%.

Required: 1. Calculate the EVA for the Adams Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign. 605,000 315,000 4,000,000 3,250,000 2. Calculate the EVA for the Jefferson Division. If required, enter a negative EVA as a negative number by entering your answer with the minus sign.

Answer 1

$125,000 and -$75,000

Step-by-step explanation:

The computation of the economic value added is shown below:

As we know that

Economic Value Added is

= Net (after-tax) income - (Capital employed × Actual cost of capital)

For Adams Division, it is

= $605,000 - ($4,000,000 × 12%)

= $605,000 - $480,000

= $125,000

And for Jefferson Division, it is

= $315,000 - ($3,250,000 × 12%)

= $315,000 - $390,000

= -$75,000

We simply applied the above formulas