COMO MINE VATE ACHE VAD = Atle tas OPET ANS MICOME HINTS Ue COSUOL Capital CHIpIOyed. Lie cost of capital employed is the actual percentage of cost of capital multiply by the net capital employed. Express in formula, EVA is computed as follows: | Economic come — [Average assets — Value Added ge current liabilities) x Cost of Capital] operating income. The tax is computed by multiplying EBT by the tax rate. Earnings before tax(EBT) Net Income Earnings before interest and taxes(EBIT) Le xx(% of EBT) Alternatively, after tax operating income can be computed as]As opposed to the computation of residual income, current liabilities are deducted to theassets in the computation of EVA. Also, calculation of EVA is not based on generally accepted accounting principles. Asan example, R&D cost isexpensed out under GAAP butit is added to the operating assets in EVA calculation. The reason is that R&D cost is expected to result on a future economic benefit. Itisshould be noticed that EVA calculation requires the use of the cost of capital as compared to residual income which usesthe minimum rate of return set by higher level of management. Cost of capital isthe cost of acquiring financing either through debt or issuance of stock. It is also referred to as weighted average cost of capital(WACC). Ifthe computed EVAis positive, then the company has increased its wealth during the period. Conversely ifitis negative, then the company decreased its wealth during the period.