Economic Value Added
Economic Value Added
Economic Value Added
On
Economic value added
Submitted by :-
Submitted to:-
Damanpreet singh
MBA sec. (A)
Roll no. 16
Economic value added
In corporate finance, Economic Value Added or
EVA is an estimate of a firm's economic profit -
being the value created in excess of the required
return of the company's shareholders - where EVA
is the profit earned by the firm less the cost of
financing the firm's capital. The idea is that
shareholders gain when the return from the capital
employed is greater than the cost of that capital;
see Corporate finance: working capital
management. This amount can be determined,
among other ways, by making adjustments to
GAAP accounting, including deducting the
opportunity cost of equity capital.
Calculating EVA
EVA is Net Operating Profit After Taxes (or NOPAT) less the
money cost of capital. Any value obtained by employees of the
company or by product users is not included in the calculations.
The basic formula is:
where:
• , is the Return on Invested Capital (ROIC);
• is the Weighted Average Cost of Capital (WACC);
• is capital employed;
• NOPAT is the Net Operating Profit After Tax, with
adjustments and translations for the amortization of
goodwill, the capitalization of brand advertising and others.
EVA Calculation
EVA = (r-c) x Capital
EVA = (r x Capital) – (c x Capital)
EVA = (NOPAT- c x Capital
EVA = operating profits – a capital charge
where: r = rate of return, and
c = cost of capital, or the
weighted average cost of capital.