INCOME STATEMENT
(Figures in $ millions)
Net sales	$ 881.00
Cost of goods sold	741.00
Depreciation	31.00
Earnings before interest and taxes (EBIT)	$ 109.00
Interest expense	12.00
Income before tax	$ 97.00
Taxes	$20.00
Net income	$ 77
BALANCE SHEET
(Figures in $ millions)
End of Year	Start of Year
Assets
Current assets	$ 369	$ 312
Long-term assets	$258	$222
Total assets	$627	$534
Liabilities and shareholders’ equity
Current liabilities	$ 194	$ 157
Long-term debt	$108	$121
Shareholders’ equity	$325	$256
Total liabilities and shareholders’ equity	$ 627	$ 534
The company’s cost of capital is 8.5%.

Required:
Calculate Watervan’s economic value added (EVA).

Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.

What is the company’s return on capital? (Use start-of-year rather than average capital.)

Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

To calculate the Economic Value Added (EVA) and the company's return on capital, we can follow these steps:

### Step 1: Economic Value Added (EVA)

The formula for EVA is:

\[
EVA = NOPAT - (WACC \times Capital)
\]

Where:
- $ NOPAT $ = Net Operating Profit After Taxes
- $ WACC $ = Weighted Average Cost of Capital (cost of capital provided: 8.5%)
- $ Capital $ = Total capital employed (use start-of-year total)

#### 1.1: Calculate NOPAT

To calculate $ NOPAT $, we use the formula:

\[
NOPAT = EBIT \times (1 - \text{tax rate})
\]

From the income statement:
- EBIT = $109 million
- Tax rate = $\frac{Taxes}{Income \ before \ tax} = \frac{20}{97} \approx 0.2062$

Now, calculate $ NOPAT $:

\[
NOPAT = 109 \times (1 - 0.2062) \approx 109 \times 0.7938 = 86.525
\]

#### 1.2: Calculate Capital

The capital employed at the start of the year is the sum of total liabilities and shareholders' equity:

\[
Capital = \text{Start-of-year total liabilities and shareholders' equity}
\]
From the balance sheet:
\[
Capital = 534 \ million
\]

#### 1.3: Calculate EVA

Now, calculate EVA:

\[
EVA = NOPAT - (WACC \times Capital)
\]
\[
EVA = 86.525 - (0.085 \times 534)
\]
\[
EVA = 86.525 - 45.39 = 41.14 \ million
\]

### Step 2: Return on Capital

The formula for Return on Capital is:

\[
\text{Return on Capital} = \frac{NOPAT}{Capital} \times 100
\]

Using $ NOPAT = 86.525 \ million $ and $ Capital = 534 \ million $:

\[
\text{Return on Capital} = \frac{86.525}{534} \times 100 = 16.20\%
\]

### Final Answers:
1. **EVA = $41.14 million**
2. **Return on Capital = 16.20%**

---

Would you like further details on these calculations or have any questions?

Here are some related questions you might find interesting:
1. What is the difference between NOPAT and Net Income?
2. How does the cost of capital affect EVA?
3. What other performance measures can be derived from this financial data?
4. How would changing the tax rate impact the EVA and return on capital?
5. How is EVA used in evaluating a company’s financial performance?

**Tip:** Using start-of-year capital often gives a more conservative estimate of return metrics.

Calculate Watervan’s economic value added (EVA) and return on capital using the provided financial data, including net sales, cost of goods sold, depreciation, EBIT, interest expense, income before tax, taxes, and balance sheet figures. The company's cost of capital is 8.5%.

This detailed solution shows how to calculate the Economic Value Added (EVA) and Return on Capital for Watervan Corporation using its income statement and balance sheet data. Key concepts include NOPAT, WACC, and capital employed. Suitable for corporate finance students.

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