Question

For 2019, Gourmet Kitchen Products reported $22 million of sales and $19 million of operating costs (including depreciation). The company has $14 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.

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Answer 1

Sales = $22,000,000

Operating costs = $19,000,000

Operating Profit = sales - operating costs = $3,000,000

Net Operating Profit After Taxes (NOPAT) = $3,000,000 * (1-0.25) = $2,250,000

Invested capital = $14,000,000

WACC = 10%

Economic Value added = Net Operating Profit After Taxes (NOPAT) - Invested Capital * Weighted Average Cost of Capital (WACC)

=> $2,250,000 - $14,000,000 * 0.1 = $850,000

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