Calculating Economic Value Added (EVA)
{"Image DocumentName": "Calculating Economic Value Added (EVA)", "Image ImageDescription": "Exhibit 16-3 shows how to calculate EVA. First, starting with a company\u2019s income statement, you calculate the net operating profit after taxes (NOPAT) by subtracting taxes owed from income from operations. (Remember, a quick review of an income statement is on the Financial Review Card bound at the back of your book.) The NOPAT shown in Exhibit 16-3 is  3,500,000. Second, identify how much capital the company has invested (i.e., spent). Total liabilities (what the company owes) less accounts payable and less accrued expenses, neither of which you pay interest on, provides a rough approximation of this amount. In Exhibit 16-3, total capital invested is  16,800,000. Third, calculate the cost (i.e., rate) paid for capital by determining the interest paid to bondholders (who lend organizations their money), which is usually somewhere between 5 and 8 percent, and the return that stockholders want in terms of dividends and stock price appreciation, which is historically about 13 percent. Take a weighted average of the two to determine the overall cost of capital. In Exhibit 16-3, the cost of capital is 10 percent. Fourth, multiply the total capital ( 16,800,000) from Step 2 by the cost of capital (10 percent) from Step 3. In Exhibit 16-3, this amount is  1,680,000. Fifth, subtract the total dollar cost of capital in Step 4 from the NOPAT in Step 1. In Exhibit 16-3, this value is  1,820,000, which means that our example company has created economic value or wealth this year. If the EVA value had been negative, meaning that the company didn\u2019t make enough profit to cover the cost of capital from bondholders and shareholders, then the company would have destroyed economic value or wealth by taking in more money than it returned.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}