See link below and hope it helps.
https://corporatefinanceinstitute.com/resources/knowledge/valuation/economic-value-added-eva/------------------------------
Lin Zhao
Student
Greensboro NC
United States
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Original Message:
Sent: 02-24-2021 01:09 PM
From: Late Lawson
Subject: Economic profit
Hello everyone.
Please help me understand the reason why "Interest" was added back to the Net Income in the calculation of the economic profit. Thanks.
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CSO: 2A4e LOS: 2A4e
The financial statements of Lark Inc. for last year are shown below.
Income Statement ($000)
| Revenue | $4,000 |
| Cost of sales | 2,900 |
| Gross margin | 1,100 |
| General & administrative | 500 |
| Interest | 100 |
| Taxes | 150 |
| Net income | $ 350 |
Balance Sheet ($000)
| Current assets | $ 800 | Current liabilities | $ 500 |
| Plant & equipment | 3,200 | Long-term debt | $1,000 |
| | | Common equity | 2,500 |
| Totals | $4,000 | Totals | $4,000 |
If Lark's book values approximate market values and if the opportunity costs of debt and equity are 10% and 15%, respectively, what was the economic profit for Lark last year?
a. ($125,000).
b. ($25,000).
c. $0.
d. $350,000.
Correct answer b. Lark's economic profit was ($25,000) as shown below.
| Economic profit | = | (Net income + interest) – (Debt + Equity Opportunity Cost) |
| | = | ($350,000 + $100,000) – [($1,000,000 x .1) + ($2,500,000 x .15)] |
| | = | $450,000 - $475,000 |
| | = | ($25,000) |