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 & EVATotal 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: firstname.lastname@example.org | Phone: 1-877-807-8756
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