Which statement best describes Economic Value Added (EVA)?

• A. Value delivered to shareholders beyond accounting profits.
• B. The difference between cash flow and debt service.
• C. Value created above the required return on capital.
• D. Overall profitability after tax and interest.

Answer: (C)

Economic Value Added focuses on economic profit after accounting for the cost of capital. It asks whether the business earns more than the return required by those who finance it. EVA is calculated as net operating profit after tax (NOPAT) minus the capital charge (invested capital times the cost of capital). When returns exceed this capital cost, EVA is positive, signaling value creation for shareholders beyond what accounting profits alone would show. This is why the statement describing EVA as value created above the required return on capital is the best fit. The other ideas miss the hurdle rate: cash flow after debt service ignores the cost of capital, and profitability after tax and interest or accounting profits alone don’t reflect the capital owners’ opportunity cost.