Economic Value Added

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.

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