Economic Value Added

Economic Value Added (EVA) = After tax Operating Profit - (Cost of Capital x Capital Employed).

Economic Value Added is a measure of profitability that takes account of the cost of capital employed.

Example:
If a project is expected to yield annual after tax operating income of $250,000, from total investment costs of $1,800,000, with a cost of capital of 8.00% per annum.

The cost of capital for the project = $1,800,000 x 0.08 = $144,000.

The economic value added = $250,000 - $144,000 = $106,000.

Since the EVA is positive the project can be accepted, provided an alternative project with higher EVA with the same or lower risk is not available.

Software Links

Ratios With Excel

Reference Pages

Cost of Capital

WACC