Fours Steps to EVA Resources > Return to Articles > Four Steps to EVA Economic Value Articles What is Economic Value Added Four Steps to EVA Making EVA Work EVA Momentum Ratio
 Four Steps to Calculating 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.