How to Calculate Economic Value Added
What is Economic Value Added?
EVA measures true economic profit: (NOPAT) - (Invested Capital × WACC). Shows value creation above cost of capital.
Formula
EVA = NOPAT - (IC × WACC)
- EVA
- value creation — value creation
- IC
- IC value — Variable used in the calculation
Step-by-Step Guide
- 1Calculate NOPAT and invested capital
- 2Determine WACC
- 3EVA = NOPAT - (IC × WACC)
- 4Positive EVA = value creation
Worked Examples
Input
NOPAT $100M, IC $1B, WACC 8%
Result
EVA = $100M - $80M = $20M (creating $20M annual value)
Better than raw profit
Common Mistakes to Avoid
- ✕Using EBIT without adjustments
- ✕Neglecting non-operating items
Frequently Asked Questions
Why is EVA better than accounting profit?
Accounts for cost of capital; many profitable companies actually destroy value.
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