NOPAT and EVA

[Only5mia]

I was working on a practice exam from Schweser. One of the questions was what is the likely effects on NOPAT and EVA from increasing invested capital to take advantage of projects with positive net present values. The answer states that the increasing invested capital will increase NOPAT and the dollar cost of capital (WACC). And because NPV is positive, the increase in NOPAT will be larger than the increase in WACC, so EVA will increase.

Is the logic to think about this that because it is positive net NPV, then it means EBIT will also increase? NOPAT = EBIT (1-t)? Then since it’s net positive, then the returns will certainly be larger than the cost of capital? Hence EVA will increase?

[Harrogath]

@Only5mia

Is the logic to think about this that because it is positive net NPV, then it means EBIT will also increase? NOPAT = EBIT (1-t)? Then since it’s net positive, then the returns will certainly be larger than the cost of capital? Hence EVA will increase?

Yes, the key point here is that NPV of the expansion project (the increase in invested capital) is positive, so the project is providing a return higher than WACC (cost of capital) as you have correctly said. If NPV of expansion was zero, then EVA would have remained constant. If NPV was negative, then EVA would have decreased.