Economic Value Add (EVA)

Formal

An identical term for NPV commonly used by management consultancies. It stands for ‘Economic Value Add’ but means the same as the ‘Net Present Value’ definition. It is an investment appraisal technique that takes the minimum investment return required by companies and applies this percentage rate to the projected cash inflows and outflows from that project. (See DCF.) The answer is either positive or negative - positive is a surplus, based on today’s money values and therefore leads to project acceptance. A negative result effectively fails in real terms to deliver the required return.

Real-world Example

A company earns $1M in operating profit but its cost of capital on the $8M invested is $800k. Its EVA is $200k - the genuine economic value created after covering the true cost of the capital tied up in the business.