Economic Value Added

Economic Value Added is a financial measurement of how much value was created or destroyed during a period. It equals net operating profit after tax minus average cost of capital employed.

Economic Value Added (EVA) = Net Operating Profit after Taxes − WACC × Capital Employed

Net operating PAT=EBIT*(1-tax rate)

Thus, EVA can simply be viewed as earnings after capital costs. EVA has little to offer for capital budgeting because EVA focuses only on current earnings. By contrast, NPV analysis uses projections of all future cash. Another problem with EVA is that it may increase the short-sightedness of managers. As per EVA, a manager will be well rewarded today if earnings are high today. Thus, the manager has an incentive to run a division with more regard for short-term than long-term value.