Explain the term 'Economic Value Added'. Consider the facts below and determine whether the company is creating wealth or destroying wealth ? Weighted average cost of capital 16.30% Tax rate 33% EBIT margin 20% Market va

The weighted average cost of debt and equity is known as the cost of capital. An enterprise invests this capital for business purpose and earns returns for the investors. The financial performance can be determined by excess earnings of the enterprise over and above the cost of capital. This is known as the "economic value added" (EVA). EVA = NOPAT - (Invested Capital x WACC) NOPAT - Net operating profit after tax WACC - Weighted average cost of capital NOPAT = EBIT (1-Tax Rate) EBIT = Earnings before interest and tax Invested Capital = (Total Assets - non interest bearing liabilities) Basically, EVA reflects the profitability of the enterprise. If positive, means that the enterprise generates true economic profit. The purpose of a business enterprise is creation of wealth to investors. Unless the EVA is positive, the investors do not get any return on their investment. Market Value of Capital ₹3,75,00,000 X Cost of Capital 16.30% Cost of Capital at Market Value - A ₹61,12,500 Operating profit before tax ₹85,00,000 Less Tax @ 33% ₹28,05,000 Net operating profit after tax - B ₹56,95,000 Economic Value Added (B-A) ₹(4,17,500) Therefore, it can be said that the company is destroying the value since the EVA is negative.