A Firm Has an Average Investment of $100,000 During the Year

question 17

Multiple Choice

A firm has an average investment of $100,000 during the year. During the same period, the firm generates an after-tax income of $16,000. If the cost of capital is 15 percent, what is the EVA?

• A)+$16,000
• B)+$15,000
• C)+$1,000
• D)−$1,000

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Definitions:

Capitalize

The accounting practice of recording a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense over time through depreciation or amortization.

Depreciate

To allocate the cost of a tangible asset over its useful life, reflecting the decline in the asset's value due to use and wear and tear.

Financial Statements

Reports that summarize the financial performance, position, and cash flows of a business over a specific period of time.

Endowment Contribution

A donation made to an institution or organization with the stipulation that it be invested and the principal remain intact, while the investment income can be used for organizational purposes.