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What is Economic Value Added (EVA)? What is Return on Invested Capital (ROIC)? How are these...

What is Economic Value Added (EVA)? What is Return on Invested Capital (ROIC)? How are these two connected and what do they measure?

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Expert Solution

Formula( EVA ):

EVA = NOPAT - (Invested Capital * WACC)

Where:

  • NOPAT = Net operating profit after taxes
  • Invested capital = Debt + capital leases + sharholders' equity
  • WACC = Weighted average cost of capital

Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.

Formula (ROIC)

ROIC=NOPAT / Invested Capital

Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its money to generate returns.

CONNECTION BETWEEN EVA & ROIC

Economic value added ( EVA ) is the spread between a firm's return on invested capital ( ROIC ) and the cost of capital multiplied by the total amount of capital invested, and measures the amount of value added with newly invested funds. EVA measures the additional value added if more money is invested in the business.

jeff jeffy answered 1 year ago
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