NOPAT and EVA believes, invested, positive, net, advantage

hoangvu90

Can someone please explain this to me:

"She considers using NOPAT and EVA to assess managment performance. She believes that increasing invested capital to take advantage of projects with positive net present values inceases both NOPAT and EVA"

Can someone please explain this?

EVA = NOPAT - (Wacc x invested Cap)

So surely increasing invested capital will reduce EVA?

I'm sure there's some fundamental thing I'm missing here but any help would be greatly appreciated.

BelalM

Damil4real Wrote:
-------------------------------------------------------
> If project NPV is positive, then it's reasonable
> to assume that return on project is greater than
> WACC. If return on project is greater than WACC,
> then EVA will increase. If EVA increases, then
> reasonable to assume NOPAT increased more relative
> to $WACC.

Thanks, my thought process was completely off in that problem.

NO EXCUSES

tarunajwani

sawa basi na elewa, asante bwana!

Thanks for your help!

flyinggirl

If project NPV is positive, then it's reasonable to assume that return on project is greater than WACC. If return on project is greater than WACC, then EVA will increase. If EVA increases, then reasonable to assume NOPAT increased more relative to $WACC.



Edited 1 time(s). Last edit at Monday, May 24, 2010 at 02:25PM by Damil4real.

yalo

True, but how do we know for sure? CFAI doesn't want us to draw conclusions based on information not provided in the item set.

NO EXCUSES

hassan

If something has a positive NPV, its discounted cash flows > WACC*invested capital. So wil increasing invested capital will reduce EVA, if it has a positive NPV, the NOPAT will increase by more than the invested capital.

KungFuPanda

what if the newly invested capital results in an increase to NOPAT that exceeds WACC x that invested capital