Economic value added is a measure of value created after deducting the cost of capital.

Economic value added is a measure of value created after deducting the cost of capital.

• A. True
• B. False
• C. Only for manufacturing
• D. Not used in practice

Answer: (A)

Yes. Economic value added (EVA) is defined as the net operating profit after tax minus the cost of capital. The capital charge is the amount of capital employed multiplied by the cost of that capital (often the weighted average cost of capital). This standard way of measuring value creation means positive EVA indicates the firm earned more than its cost of capital, while negative EVA means value was destroyed. EVA is widely used in practice as a performance measure and decision aid because it ties profitability directly to the capital the firm uses. For example, if NOPAT is 120 and capital employed is 800 with a cost of capital of 10%, EVA = 120 − (0.10 × 800) = 40, indicating value created above the capital cost.

Yes. Economic value added (EVA) is defined as the net operating profit after tax minus the cost of capital. The capital charge is the amount of capital employed multiplied by the cost of that capital (often the weighted average cost of capital). This standard way of measuring value creation means positive EVA indicates the firm earned more than its cost of capital, while negative EVA means value was destroyed. EVA is widely used in practice as a performance measure and decision aid because it ties profitability directly to the capital the firm uses. For example, if NOPAT is 120 and capital employed is 800 with a cost of capital of 10%, EVA = 120 − (0.10 × 800) = 40, indicating value created above the capital cost.