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    ECONOMIC VALUE ADDED

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    Company A has a WACC of 10%. The income statement is below:

    Sales $10 million
    Operating Costs $6 million
    __________
    Operating Income (EBIT) $4.0 million
    Interest Expense $2.0 million
    ___________
    Earnings before taxes (EBT) $2.0 million
    Taxes (40%) $0.8 million
    ___________
    Net Income $1.2 million

    How do I calculate the EVA?

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    ECONOMIC VALUE ADDED
    Economic Value Added is often defined as 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 - rate of interest in sovereign debt. If sovereign debt can be considered an alternative opportunity to invest working capital and equity.
    The basic formula is :

    EVA = NOPAT - ...

    Solution Summary

    This explains the steps to compute the ECONOMIC VALUE ADDED

    $2.49

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