What's the formula for net cost of value added item?

Business & Finance
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Jan 8th, 2015

EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital. The basic formula is:

 \mathit{EVA} \ = \  ( r - c ) \cdot K   \ = \  \mathit{NOPAT} -  c \cdot K 

where:

 r = {  \mathit{NOPAT} \over K } , is the Return on Invested Capital (ROIC);

 c \, is the weighted average cost of capital (WACC);

 K \, is the economic capital employed;

NOPAT is the net operating profit after tax, with adjustments and translations, generally for the amortization of goodwill, the capitalization of brand advertising and other non-cash items.

EVA Calculation: Z

EVA = net operating profit after taxes – a capital charge [the residual income method]

therefore EVA = NOPAT – (c × capital), or alternatively

EVA = (r x capital) – (c × capital) so that

EVA = (r-c) × capital [the spread method, or excess return method]


Jan 8th, 2015

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