Economic Value Added (EVA) is defined as which of the following?

• A. The amount by which company profits exceed the cost of capital in a given year
• B. Net profit after tax
• C. Cash flow after financing
• D. Market value added

Answer: (A)

EVA measures economic profit by comparing after‑tax operating earnings with the cost of all capital tied up in the business. It uses NOPAT (net operating profit after tax) minus a capital charge, where the capital charge is the cost of capital (often the weighted average cost of capital, WACC) multiplied by invested capital. In other words, EVA is the amount by which profits exceed the cost of capital in a given year. This is why a positive EVA indicates value creation and a negative EVA indicates value destruction.

Net profit after tax is merely accounting profit after taxes, which can be affected by financing and accounting choices and doesn’t subtract the cost of the capital employed. Cash flow after financing is about cash movement, not whether returns cover the cost of capital. Market value added is a broader measure of value created for shareholders over time, not the annual excess of operating profit over capital cost. The idea behind EVA is precisely that excess return after charging for the capital required to generate it.