Finance
Economic Value Added (EVA), NOPAT & ROIC vs WACC Economic Spread
Calculate Net Operating Profit After Tax NOPAT = EBIT * (1 - Tax), Economic Value Added EVA = NOPAT - (Invested_Capital * WACC), and the ROIC - WACC value-creation spread.
Measure true economic profit after charging the full opportunity cost of capital!
Accounting net income deducts debt interest expense while treating equity capital as if it were free—so a division can report positive accounting profit while destroying shareholder wealth! Economic Value Added (EVA) charges the full Weighted Average Cost of Capital (WACC) against total Invested Capital (IC): EVA = NOPAT - (IC * WACC), where NOPAT = EBIT * (1 - Tax_Rate) is unlevered Net Operating Profit After Tax!
Dividing NOPAT by Invested Capital defines Return on Invested Capital (ROIC = NOPAT / IC), letting corporate FP&A rewrite EVA in economic-spread form: EVA = (ROIC - WACC) * IC! Whenever ROIC > WACC, new capital deployment creates positive intrinsic value; whenever ROIC < WACC, growth amplifies value destruction!
| Business Unit (IC = $1,000M, Tax = 25%, WACC = 9.5%) | EBIT / NOPAT ($M) | ROIC - WACC Spread | Annual EVA ($M) |
|---|---|---|---|
| Core Cloud Platform | $180M / $135.0M | 13.5% - 9.5% = +4.00% | +$40.00M (Value Creating) |
| Cost-of-Capital Breakeven | $126.67M / $95.0M | 9.5% - 9.5% = 0.00% | $0.00M (Zero Economic Profit) |
| Legacy Hardware Division | $110M / $82.5M | 8.25% - 9.5% = -1.25% | -$12.50M (Value Destroying!) |
Economic Value Added EVA = EBIT * (1 - Tax) - (IC * WACC)
Computes NOPAT minus the dollar capital charge IC * WACC, validating positive Invested Capital B4 and valid tax rate B3.
=IF(OR(B4 <= 0, B3 < 0, B3 >= 1), "Invalid Capital or Tax Rate", ROUND(B2 * (1 - B3) - (B4 * B5), 2))Economic Return Spread (ROIC - WACC)
Evaluates (NOPAT / IC) - WACC as a decimal spread (e.g., 0.04 = +4.0% above hurdle).
=IF(B4 <= 0, "Invalid Invested Capital", ROUND((B2 * (1 - B3)) / B4 - B5, 4))Try the example
Use the original values or change them to test your understanding.