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# Economic Value Added Formula and Examples

Peter Crain, DOUGLAS HAWKS
• Author
Peter Crain

Peter works as a franchise and business consultant, and has a background of diverse business experience before that. He holds an MBA in Pharmaceutical and Healthcare Business from University of the Sciences in Philadelphia as well as a Bachelor of Music from West Chester University.

• Instructor
DOUGLAS HAWKS

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Discover the economic value added formula. Learn the definition of economic value added and understand its calculation. Find various EVA calculation examples. Updated: 12/06/2022

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## What is Economic Value Added?

Economic value added, or EVA, is the measure of extra money earned by a company based on what remains after the cost of capital is removed from operating profits. This is also known as the economic profit or net profit. Companies can use economic value added as a way to measure how effective they are at attracting investments that do not require a larger return for their money. This return is the cost of capital and is what investors expect in exchange for putting money into a company. There are many different ways a company measures its efficiency and ability to earn as much as possible. The economic value added metric is a way to consider how well investments are used and undertaken versus how much a company will profit based on them.

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The economic value added formula is used to calculate the economic profit of a company. The EVA formula is:

EVA = net operating profit after taxes - (invested capital x WACC)

WACC stands for weighted average cost of capital. It is a calculation of several different factors in a company that go into what it costs to raise money. The factors considered include the interest rate on the debt that is owed, the expected return on a stock, and opportunity cost. Opportunity cost would be the money a company could be making if it spent it elsewhere in the organization, hence the opportunity. Establishing the Weighted average cost of capital could be seen as the cost of putting existing money into other investments.

Calculating WACC is something that is left to programs such as excel since there is a lot of information needed for the formula and the formula itself is quite complicated. The answer for WACC is a percentage.

## Calculation of EVA

Putting the economic value added formula into practice, an EVA calculation could look like the following:

A company has a net profit of \$250,000 after taxes. They raised a total of \$75,000 for a project that year with a weighted average cost of capital of 8%.

EVA = 250,000 - (75,000 x .08)

EVA = 250,000 - 6,000

EVA = \$244,000

This is the company's economic profit for the year.

• Evaluating company performance â€” While there is a multitude of ways in which a company can evaluate its efficiency and performance, economic value added can show how well a company uses its investment money to create a good profit for itself.
• Evaluating generated wealth â€” Similar to the first advantage, a higher economic value added number can tell how well the company's management did to garner inexpensive capital in order to make investments profitable. It will always be in a company's best interest to maximize outside money in both what is owed to investors and what is able to be retained.

There are disadvantages to using economic value added as a metric as well:

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#### What does economic value added mean?

Economic added value is the measure of how a company has profited after subtracting what is owed to investors. This is known as economic profit.

#### Why is economic value added important?

Economic added value is important because it can show how a company is increasing wealth. It also can show how effective management is at securing low-cost capital.

#### How do you calculate economic value added?

Economic value added is calculated by a few items. It is the net profit after taxes subtracted by investment capital and the weighted average cost of capital.

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