Can someone walk through EVA (Economic Value Added) with a detailed calculation and explain the accounting adjustments?
I keep struggling with EVA calculations on CFA practice exams. I understand the concept — profit after deducting the cost of capital — but the accounting adjustments trip me up. Which adjustments are most important, and how do they change the EVA number?
Economic Value Added (EVA) measures the dollar value of wealth a company creates (or destroys) after charging for all capital used, including equity.
Basic EVA Formula:
EVA = NOPAT - (WACC x Invested Capital)
Alternatively: EVA = (ROIC - WACC) x Invested Capital
If ROIC > WACC, the company creates value. If ROIC < WACC, it destroys value.
Detailed Example — Brookfield Industrials:
| Item | Amount |
|---|---|
| Operating income (EBIT) | $480M |
| Tax rate | 25% |
| NOPAT (before adjustments) | $360M |
| Total equity | $2,000M |
| Total debt | $1,200M |
| Cash | $200M |
| Invested capital | $3,000M |
| Cost of equity | 11% |
| Cost of debt (after-tax) | 4.5% |
| WACC | 8.4% |
Step 1 — Unadjusted EVA:
EVA = $360M - (8.4% x $3,000M) = $360M - $252M = $108M
Step 2 — Key Accounting Adjustments:
Most Important Adjustments:
- R&D capitalization: GAAP expenses R&D immediately, but it creates future economic value. Capitalize and amortize over useful life.
- Operating leases: Treat as financing (add right-of-use assets to invested capital, add implicit interest to NOPAT). Under IFRS 16 / ASC 842 this is partially addressed.
- Restructuring charges: If recurring, include in NOPAT. If truly one-time, exclude.
- Goodwill amortization/impairment: Add back to NOPAT to measure ongoing operational performance.
Interpretation:
Brookfield's adjusted EVA of $153.5M means the company created $153.5 million in shareholder wealth beyond the cost of all capital employed.
CFA Exam Focus: Know the formula, be able to compute EVA from a vignette, and understand which adjustments increase vs. decrease EVA.
Practice EVA calculations in our CFA equity question bank.
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