Economic value added - part 2

In this lesson

1. 0:00 Economic Value Added Introduction
2. 0:39 Calculating NOPAT Step by Step
3. 2:04 Computing Capital Charge
4. 3:12 EVA Calculation and Result
5. 3:27 Strengths of Economic Value Added
6. 4:53 Limitations and Drawbacks

About this lesson

This video walks you through a worked example, showing how to adjust profit before interest and tax to find NOPAT, calculate the capital charge using weighted average cost of capital, and arrive at EVA by subtracting the capital charge from NOPAT. You'll also explore the key strengths of EVA—it aligns with shareholder wealth maximisation and removes distortions from accounting policies—alongside its significant limitations, including complexity, historical focus, and difficulty in making meaningful comparisons between businesses. Economic value added is a critical concept in performance management, particularly for CIMA students studying Advanced Performance Management and Strategic Management modules. Understanding how to calculate and interpret EVA equips you to evaluate whether a business is truly creating value beyond its cost of capital, a question that sits at the heart of strategic financial decision-making. The video emphasises the practical adjustments needed—replacing accounting depreciation with economic depreciation, using cash taxes rather than accounting taxes, and valuing net assets at replacement cost—all of which reflect the true economic position of the business rather than accounting conventions.

Duration: 6m