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Economic Value Added

Concept Briefing: Economic value added or EVA is the value of an activity that is left over after subtracting from it the cost of executing that activity and the cost of having lost the opportunity of investing consumed resources in an alternative activity. In business terms, one could calculate EVA as Income from Operations minus potential income from investing the amount of capital employed including equity in sovereign debt, if sovereign debt can be considered an alternative opportunity to invest capital.

The formula for calculating EVA is as follows:

EVA = Net Operating Profit After Taxes (NOPAT) - (Capital x Cost of Capital)

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

See also EVA Momentum.

30 May 2011 04:03:22

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