A firm with 2500000 total capital invested generates 1500000

A firm with $2,500,000 total capital invested generates $1,500,000 of EBIT or operating profit. The firm\'s tax rate is 40% and it\'s cost of capital is 8%. How much economic value added or EVA did the firm generate? (show to the nearest dollar)

Solution

EVA = NOPAT - (WACC * Capital Invested)

NOPAT = Net Operating profit after tax = EBIT*(1-tax rate) = 1,500,000*(1-0.4) = 900,000

WACC = 8% = 0.08

Capital Invested = 2,500,000

EVA = 900,000 -(0.08*2,500,000) = 900,000 - 200,000 = 700,000

Economic value added or EVA = $700,000