NOPAT and EVA

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.

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

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.

I’ll say EVA & NOPAT will increase since project NPV is positive.

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.

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.

sawa basi na elewa, asante bwana! Thanks for your help!

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.