For 2012, Everyday Electronics reported $22.5 million on sales and $18 million of operating costs (including depreciation). The company has $15 million of investment-supplied operating capital. Its weighted average cost of capital is 9% 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 2012?

An Economic value added is an estimate of a company's economic gain, or the amount created in excess of the required return on the company's shareholders.

[tex]\rm\,Economic\,Value\,Added = Net\,Operating\,Profit\,After\,Tax - (Operating\,Capital\times Weighted\,Average\,Cost\,of\,Capital)[/tex]

So, lets first calculate the value of Net Operating Profit before tax:

[tex]\rm\, Net\,Operating\,Profit\,Before\,Tax = Sales - Operating\, Costs\\\\\rm\, Net\,Operating\,Profit\,Before\,Tax = 22,500,000 - 18,000,000\\\\\rm\, Net\,Operating\,Profit\,Before\,Tax = \$ 4,500,000\\\\[/tex]

Now, The Net operating profit after taxes:

[tex]\rm\,Net\,Operating\,Profit\,After\,Tax = Net\,Operating\,Profit\,Before\, Tax - (0.35 \times 4,500,000)\\\\\rm\,Net\,Operating\,Profit\,After\,Tax = \$4,500,000 - (0.35 \times 4,500,000)\\\\\rm\,Net\,Operating\,Profit\,After\,Tax = \$4,500,000 - \$1,575,000\\\\\\rm\,Net\,Operating\,Profit\,After\,Tax = \$2,925,000\\[/tex]

Calculation of Economic Value Added:

[tex]\rm\,Economic\,Value\,Added = Net\,Operating\,Profit\,After\,Tax - (Operating\,Capital\times Weighted\,Average\,Cost\,of\,Capital)\\\\\rm\,Economic\,Value\,Added = \$ 2,925,000 - (\$ 15,000,000\times 9\%)\\\\\rm\,Economic\,Value\,Added = \$ 2,925,000 - \$1,350,000\\\\\rm\,Economic\,Value\,Added = \$ 1,575,000[/tex]

Hence, the Everyday Electronics Economic Value added is $1,575,000 during the year 2012.

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