In corporate finance, Economic Value Added or EVA® is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. GAAP is estimated to ignore US\$300 billion in shareholder opportunity costs. EVA can be measured as Net Operating Profit After Taxes(or NOPAT) less the money cost of capital. Money cost of capital refers to the amount of money rather than the proportional rate (cost of capital). The amortization of goodwill or capitalization of brand advertising and other similar adjustments are the translations that occur to Economic Profit to make it EVA. The EVA is a registered trademark by its developer, Stern Stewart & Co.

Calculating EVA

In the field of corporate finance, economic values added is a way to determine the value created, above the required return, for the shareholders of a company.

The basic formula is:

:$EVA = \left( r - c \right) cdot K = NOPAT - c cdot K$

where

:$r = \left\{ NOPAT over K \right\}$ , called the Return on Invested Capital (ROIC).

is the firm's return on capital, "NOPAT" is the Net Operating Profit After Tax, "c" is the Weighted Average Cost of Capital (WACC) and "K" is capital employed.

Shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital; see Working capital management. Any value obtained by employees of the company or by product users is not included in the calculations.

The firm's market value added, or MVA, is the discounted sum of all future expected economic value added:

:$MVA = V - K_0 = sum_\left\{t=1\right\}^\left\{infty\right\} \left\{ EVA_t over \left(1+c\right)^t \right\}$

Note that MVA = NPV of company.

Criticism

* EVA could be misleading as a wealth metric because it reflects momentary swings in the capital markets rather than inherent company performance.Fact|date=February 2008

* EVA is also shareholder-centric and hence of little relevance to the rest of the stake holders.Fact|date=February 2008

* EVA is identical to residual income, which was largely abandoned by US companies years ago (Keys, Azamhuzjaev, and Mackey, 2001).

Other measures of shareholder value

*Total Shareholder Return

ee also

*Free cash flow
*Enterprise value
*Opportunity cost
*Weighted average cost of capital

References

*
*

* [http://www.eva.com Economic Value Added] from Stern Stewart & Company
* [http://www.kellogg.northwestern.edu/faculty/korajczy/htm/vbm.htm A Reading List on EVA/Value Based Management] from Robert Korajczyk
* [http://www.valuatum.com/valuation/valuation_tutorial_tiedostot/frame.htm#slide0132.htm EVA valuation tutorial] from valuatum.com
* [http://www.investopedia.com/university/EVA/ Understanding Economic Value Added] , investopedia.com
* [http://www.investopedia.com/articles/fundamental/03/031203.asp All About EVA] , investopedia.com
* [http://www.uwasa.fi/~ts/eva/eva.html Economic Value Added: A simulation analysis of the trendy, owner-oriented management tool] , Timo Salmi and Ilkka Virtanen, 2001
*Apples & Oranges busıness sımulatıon by Celemı

Wikimedia Foundation. 2010.

### Look at other dictionaries:

• Economic Value Added — Economic Added Value Treiberbaum Der Economic Value Added (EVA) oder Geschäftswertbeitrag ist eine Messgröße aus der Finanzwirtschaft, um die Vorteilhaftigkeit einer Investition zu berechnen. EVA stellt einen Residualgewinn dar und ergibt eine… …   Deutsch Wikipedia

• economic value added — ( EVA®) See shareholder value added ( SVA). Since EVA is a registered mark, the phrase shareholder value added, or SVA, is often used instead. American Banker Glossary ( EVA) …   Financial and business terms

• economic value added — See economic profit. Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010 …   Law dictionary

• Economic value added — Valeur économique ajoutée Pour les articles homonymes, voir EVA. La valeur économique ajoutée (Economic Value Added, EVA) est l excédent de résultat du à l activité d une organisation par rapport au coût du financement des apporteurs de capitaux …   Wikipédia en Français

• Economic Value Added — EVA A performance measure used to evaluate a company s economic profit (i.e., the value added to a company by its activities in a given time period). It is the calculation of a company s net operating profit after taxes, minus a cost of capital… …   Accounting dictionary

• Economic Value Added — EVA A performance measure used to evaluate a company s economic profit (i. e. , the value added to a company by its activities in a given time period). It is the calculation of a company s net operating profit after taxes, minus a cost of capital …   Big dictionary of business and management

• economic value added — /ˌi:kənɒmɪk ˌvælju: ædɪd/ noun the difference between a company’s profit and the cost of its capital. A company does not have simply to make a profit from its business – it has to make enough profit to cover the cost of its capital, including… …   Dictionary of banking and finance

• Economic Value Added - EVA — A measure of a company s financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as economic profit .) The formula for… …   Investment dictionary

• Economic Value Added (EVA) — Kennzahl, die im Rahmen eines umfassenden Performancemessungs und Wertsteigerungskonzepts zur Anwendung kommt. Der EVA Ansatz errechnet ein wertorientiertes Residualeinkommen der zu bewertenden Investition. Eine Investition ist nach diesem Ansatz …   Lexikon der Economics

• Value added — refers to the additional value of a commodity over the cost of commodities used to produce it from the previous stage of production. An example is the price of gasoline at the pump over the price of the oil in it. In national accounts used in… …   Wikipedia