Economic Value

Added
(EVA)
Prepared by: Rendell Bellen
 1.
What is Economic
Value Added (EVA)?
 What is Economic
Value Added (EVA)?
• The incremental difference between a
company's rate of return (ROR) and its cost
of capital is known as EVA. It basically
serves as a benchmark for the value that
investments in a firm produce. An
organization is not making money from the
capital invested in the firm if its EVA is
negative. A positive EVA, on the other
hand, demonstrates that a business is
making money off of the capital put in it.
Formula on Calculating
EVA
The formula for calculating EVA is:
EVA = NOPAT - (Invested Capital x WACC)
Where:
NOPAT = Net operating profit after taxes
Invested capital = Debt + capital leases +
shareholders' equity
WACC = Weighted average cost of capital
 2.
What are the Special
Considerations of EVA?
 What are the Special
Considerations of EVA?
• The three primary components of a company's EVA,
according to the EVA equation, are the NOPAT, the
amount of capital invested, and the WACC. Although
manually calculated, NOPAT is typically reported in a
public company's financials.

• The sum of money utilized to finance a business or a

particular project is known as the capital invested. The
weights are calculated as a percentage of each financial
source in a business's capital structure, and WACC is
the average rate of return a company intends to pay its
investors. WACC is typically provided but can also be
calculated.
 What are the Special
Considerations of EVA?
• In order to calculate invested capital in EVA, the
conventional formula is total assets less current
liabilities, two numbers that may be easily obtained on
a company's balance sheet. In this instance, NOPAT -
(total assets - current liabilities) * WACC is the
modified formula for EVA.

• EVA's objective is to estimate the cost of investing

capital in a certain project or company and determine
whether it generates enough revenue to be regarded as a
wise investment. A project that has a positive EVA is
producing returns that are higher than the minimum
required.
 3.
What are the
Advantages and
Disadvantages of EVA?
 What are the Advantages and
Disadvantages of EVA?
• Eva has the benefit of being a very helpful performance
indicator. The inclusion of balance sheet components in
the computation reveals how and where a corporation
generated value. Because of this, managers are
compelled to consider assets and costs while making
managerial decisions.

• The EVA calculation is most effective for stable or

established businesses with a lot of assets because it
significantly relies on the amount of capital spent.
Businesses with intangible assets, such those in the
technology industry, might not make suitable
candidates for an EVA assessment.