## What is Economic Value Added?

Economic Value Added (EVA) is a measure of a company’s economic performance. It is calculated by subtracting a company’s cost of capital from its operating profit after taxes (also known as NOPAT). The result is the company’s economic profit, which is the value it has created for its shareholders.

## How is Economic Value Added Calculated?

EVA is calculated by taking the following steps:

• Calculate the NOPAT (Net Operating Profit After Tax)
• Subtract the Cost of Capital from the NOPAT to determine Economic Profit
• Divide Economic Profit by the Capital Invested in the Company

The formula for EVA is as follows: EVA = NOPAT – Cost of Capital x Capital Invested

## Examples of Economic Value Added

Let’s take a look at a couple of examples of how EVA can be used to measure a company’s performance.

• Company A has a NOPAT of \$20 million and a cost of capital of 10%. The company’s capital invested is \$100 million. Therefore, the company’s EVA is \$2 million (\$20 million – \$10 million x \$100 million).
• Company B has a NOPAT of \$30 million and a cost of capital of 15%. The company’s capital invested is \$150 million. Therefore, the company’s EVA is \$2.5 million (\$30 million – \$15 million x \$150 million).

In both of these examples, the companies have created economic value for their shareholders.

## Conclusion

Economic Value Added (EVA) is a measure of a company’s economic performance. It is calculated by subtracting a company’s cost of capital from its operating profit after taxes. EVA is a useful metric for measuring a company’s performance and it can be used to compare companies within an industry.