Value Added (Economic)% (VAE%)

Formal

VAE % stands for Value Added (Economic) % and is the profit on the investment described in a suitable format for external investors in the business. If the investors expect, e.g. a 10% return on their investment, they ‘make money’ only to the extent that their share of after-tax operating profits exceeds the business’ minimum returns. Hence, the VAE % is the difference between the IRR % of the proposal and the minimum % return required by the customer. Management Consultancies often refer to this ‘Economic Value Add’ (or EVA%). A positive answer = IRR is higher than the minimum requirements of the customer, and the project should be accepted. A negative answer = IRR is lower than the minimum requirements of the customer, and the project may not be accepted on these current parameters.

Real-world Example

A business unit's VAE, expressed as a percentage of capital employed, lets management compare value creation across units of very different sizes on a like-for-like basis.