Question

For 2018, Gourmet Kitchen Products reported $23 million of sales and $18 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 35%. What was the firm's economic value added (EVA), that is, how much value did management add to stockholders' wealth during 2018? 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

$1,750,000

Step-by-step explanation:

Economic value added (EVA) = Net operating profit after taxes - Invested capital * Cost of capital

Economic value added (EVA) = [($23,000,000 - $18,000,000)*(1 - 0.35)] - [$15,000,000*10%]

Economic value added (EVA) = $5,000,000*(0.65) - $1,500,000

Economic value added (EVA) = $3,250,000 - $1,500,000

Economic value added (EVA) = $1,750,000

Hence, the management add the value of $1,750,000 to stockholders' wealth during 2018.