Economic Value Added (EVA) is defined as NOPAT minus which cost?

• A. NOPAT minus invested capital × WACC (capital charge)
• B. NOPAT minus depreciation
• C. NOPAT minus taxes
• D. NOPAT minus interest expense

Answer: (A)

EVA measures value created after covering the cost of all capital deployed in the business. It uses NOPAT, which is operating profits after taxes (excluding financing costs), and then subtracts the cost of capital tied up in the business. That cost is the capital charge, calculated as invested capital multiplied by the weighted average cost of capital (WACC). So EVA = NOPAT − (Invested capital × WACC). This reflects whether the firm generates enough operating profit to cover the opportunity cost of the capital invested.

Depreciation isn’t subtracted here because NOPAT already reflects after-tax operating performance, and the capital charge is about the cost of capital, not non-cash accounting amounts. Taxes are baked into NOPAT, so subtracting taxes again would misstate the calculation. Interest expense is a financing cost, which NOPAT excludes by definition, so subtracting it would double-count financing costs.