Answer: $2,625,000
Explanation:
From the question, we are told that
Gourmet Kitchen Products reported $22.5 million of sales and $17 million of operating costs which included depreciation and that the company has $15 million of total invested capital. We were also given the after-tax cost of capital as 10% and the federal-plus-state income tax rate as 25%.
The economic value added will be the difference between the net operating profit after taxes and the invested capital which will then be multiplied by the cost of capital. This can be written as:
= ($22,500,000 - $17,000,000) × (1 - 25%) - ($15,000,000 × 10%]
= ($5,500,000 × 0.75) - ($1,500,000)
= $4,125,000 - $1,500,000
= $2,625,000
The firm's firm's economic value added (EVA) will be $2,625,000
