### Four Steps to Calculating Economic Value Added (EVA)

EVA or Economic Value Added is a financial measurement of how much value was created or destroyed for the reporting period. The following example illustrates a four step approach to calculating EVA:

Step 1: Calculate NOPAT (Net Operating Profits After Taxes)

Gross Profits (Sales - Cost of Goods Sold) of \$ 100,000 less Depreciation & Amortization of \$85,000 = \$15,000 less income taxes @ 30% = NOPAT of \$ 10,500.

Step 2: Determine Amount of Capital Deployed

Net Working Capital of \$ 20,000 + Net Fixed Assets of \$ 60,000 = Total Capital Deployed of \$ 80,000.

Step 3: Calculate Your Weighted Average Cost of Capital

We will assume that the Capital Asset Pricing Model was used for calculating an equity cost of capital of 14% and that market weights show 65% debt and 35% equity. Cost of Equity x Market Weights or .14 x .35 = .049. Cost of Debt x Market Weights or .09 x .65 = .0585. This gives us Weighted Average Cost of Capital of .1075 or 10.75% (.049 + .0585).

Step 4: Calculate Capital Charge to NOPAT & EVA

Total Capital Deployed (Step 2) was \$ 80,000 x Weighted Average Cost of Capital (Step 3) of .1075 = Total Charge for Cost of Capital \$ 8,600. Now take NOPAT (Step 1) which was \$ 10,500 Less Charge for Cost of Capital of \$ 8,600 = Economic Value Added or EVA of \$ 1,900.

Written by: Matt H. Evans, CPA, CMA, CFM | Email: matt@exinfm.com | Phone: 1-877-807-8756

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