How do I compute and interpret Economic Value Added (EVA)?

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AcadiFi · Accepted Answer

EVA measures dollar value creation after charging for the full cost of capital. It equals NOPAT minus a capital charge. EVA = NOPAT - (WACC × Invested Capital) For Beaconfield Industrial: - NOPAT = $162M - WACC = 8.4% - Invested Capital = $1,450M - Capital Charge = 0.084 × 1,450 = $121.8M - EVA = 162 - 121.8 = $40.2M Positive EVA means the firm earned more than its cost of capital; negative EVA signals value destruction regardless of reported profits. Judgment calls: 1. WACC methodology: use target capital structure, not the momentary one, to avoid period-to-period whipsaw. 2. Invested capital timing: beginning-of-period vs. average. Average is fairer; beginning aligns with budget targets. 3. R&D and lease capitalization: consistent with ROIC adjustments. 4. Goodwill treatment: some analysts exclude goodwill to isolate operational performance; others include it to measure true return on acquired capital. Disclose choice. ```mermaid flowchart LR A[NOPAT] --> B[EVA] C[Capital
Charge] --> B D[WACC] --> C E[Invested
Capital] --> C ``` EVA is powerful for incentive design because it penalizes empire-building that does not clear the cost of capital hurdle. Track EVA trend, not level, across a cycle.

How do I compute and interpret Economic Value Added (EVA)?

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