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Economic Value Added (EVA)

One of the biggest problems of measuring anything is to get the best representation to allow optimal decisions to be made. EVA is a financial measure that has received a lot of coverage along the style of 'better then Return on Investment'.

 

EVA = Net operating profit after taxes - (capital x cost of capital)

 

The 'cost of capital' is a magic number that comes from the weighted average of equity and debt.

EVA is thus net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. As such, EVA aims to estimate the true "economic" profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that shareholders and lenders could get by investing in other companies of comparable risk.

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