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Chapter 6

Economic value added (EVA) is similar to residual income, except the
profit figure used is the ECONOMIC profit and the capital employed
figure used is the ECONOMIC capital employed. It is argued that the
profit and capital employed figures quoted in the financial statements do
not give the true picture and that the accounting figures need to be
adjusted.

$
PAT is adjusted to give the Net Operating Profit After Tax (NOPAT) X

Less:
Economic value of capital employed × Cost of Capital (X)
–––
EVA X
–––

NOPAT is calculated from PAT

PAT X
Add back non-cash items such as
Depreciation X
Provision for doubtful debts X
Non-cash expenses X
Interest paid of tax X
Add back items that add value, such as
Goodwill amortised X
Development costs X
Operating leases X
Take off
Economic depreciation
Any impairment in the value of goodwill (X)
–––
= NOPAT in cash flow terms X
–––
Deduct the charge for cost of capital (X)
–––
EVA X

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