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Lowell Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had...

Lowell Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 40%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?

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Answer #1

Net operating profit after tax formula = (Sales -operating cost)*(1-tax rate)      
(12500-7025)*(1-40%) =   3285  
Invested capital =   18750  
Wacc rate = 9.5% or   0.095  
Economic Value Added (EVA) = Net operating profit after tax - (invested capital * WACC rate)      
3285 - (18750*0.095)      
$1,503.75      
      
So, EVA or value created by management is    $1,503.75  
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