Can someone explain why adjustments are made to NOPAT (like cash taxes, capitalisation of expenses, operating lease treated as finance lease, LIFO adjustments, etc) for calculation of EVA??
Can someone kindly help me out with this??
You adjust NOPAT based on adjustments to the balance sheet., to keep consistent.
Capitalizing R&D and expensing it instead of amortizing on the income statement will lead to an artificially low ROIC. Because you’ve increased your assets without adjusting the income for it. So any adjustments to one must be made to the other to get a proper measure of return ratio on investment.
The idea of EVA is how much profit the company manage to made beyond the cost of capital. You want this economic profit:
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to be comparative to other companies’ ones;
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not to be influenced by accounting choices;
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to reflect economic reality and to be conservative enough.
So you adjust NOPAT in the same manner as you adjust IS to analyse the company’s performance.