Question

For 2019, Gourmet Kitchen Products reported $21 million of sales and $17 million of operating costs (including depreciation). The company has $15 million of total invested capital. Its after-tax cost of capital is 10% and its federal-plus-state income tax rate was 25%. What was the firm's economic value added (EVA), that is, how much value did management add to stockholders' wealth during 2019? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary.

Answer 1

Answer:$1,500,000

Step-by-step explanation:

Economic value added (EVA) can be calculated as:

Net operating profit after taxes - The Invested capital × The cost of capital

Slotting the values into the above formula will be:

= ($21,000,000 - $17,000,000) × (1 - 25%) - ($15,000,000 × 10%)

= $4,000,000 × 75% - ($15,000,000 × 0.1)

= ($4,000,000 × 0.75) - $1,500,000

= $3,000,000 - $1,500,000

= $1,500,000

Therefore, the firm's economic value added (EVA) is $1,500,000.