Economic value added (EVA)

In this lesson

1. 0:00 Economic Value Added introduction
2. 1:55 Why profits don't equal shareholder value
3. 3:14 NOPAT calculation and adjustments
4. 6:10 Capital employed and WACC charge
5. 7:31 Advantages of EVA method
6. 9:08 Disadvantages and limitations
7. 10:09 EVA for divisional performance
8. 12:21 Worked example calculation

About this lesson

You'll work through the calculation (NOPAT less the capital charge), understand the key adjustments needed to convert accounting profit into economic profit, and see how EVA compares to other performance measures like residual income and return on capital employed. The lesson covers the practical mechanics of calculating EVA, including how to adjust for non-cash items like depreciation and capitalised investments in marketing or research and development. You'll learn why interest costs are added back to profit (to avoid double-counting in WACC), how to value the capital employed at the start of the period, and why these adjustments matter for getting a true picture of economic performance. The session explores the real advantages—EVA aligns management incentives with shareholder wealth maximisation and discourages short-termism—alongside the practical drawbacks, such as complexity and the difficulty of comparing divisions fairly. By the end, you'll be confident applying EVA to exam questions and understanding when it's the right tool for evaluating business or divisional performance. This concept appears across CIMA and ACCA performance management papers and is essential for anyone assessing whether an organisation is genuinely creating value.

Duration: 15m