Capital Charge & Economic Profit (EVA) Lab

Scenario presets

Capital Base, Operating Income & WACC

Total invested capital ($)

Operating income (EBIT) ($)

Effective tax rate (%)

WACC hurdle rate (%)

Cost of equity (Ke) (%)

Debt weight in capital (Wd) (%)

Economic Profit & Wealth Creation Diagnostics

Calculating economic profit...

ROIC vs WACC Spread

Net Operating Profit After Tax (NOPAT): -
Capital Charge (Capital × WACC): -
Economic Profit (EVA): -
Return on Invested Capital (ROIC): -
Economic Value Spread (ROIC - WACC): -
EVA / NOPAT Conversion Ratio: -
Shareholder Value Verdict: -

Economic Profit (EVA) Reconciliation Waterfall

Comprehensive reconciliation detailing operating earnings, tax drag, NOPAT, invested capital hurdle, and net wealth creation.

Reconciliation waterfall showing invested capital, EBIT, tax expense, NOPAT, capital charge, and net economic profit.
Metric / Component	Amount ($)	% of Invested Capital	Economic Role	Value Impact

Sensitivity Analysis 1: Invested Capital vs. WACC on Annual Capital Charge ($)

Annual financing cost hurdle sensitivity across varying invested capital bases and capital costs.

Annual capital charge dollar amount by invested capital and WACC. Rows change invested capital, columns change WACC.
Invested Capital \ WACC	6.50%	7.50%	Base (8.50%)	9.50%	10.50%

Sensitivity Analysis 2: ROIC vs. WACC on Economic Spread (ROIC - WACC) (%)

Economic value spread sensitivity across operating returns on capital and corporate hurdle rates.

Economic spread percentage by ROIC and WACC. Rows change ROIC, columns change WACC.
ROIC \ WACC	6.50%	7.50%	Base (8.50%)	9.50%	10.50%

Formulas and worked example

$\text{Net Operating Profit After Tax (NOPAT)} = \text{Operating Income (EBIT)} \times (1 - \text{Tax Rate})$
$\text{Return on Invested Capital (ROIC)} = \frac{\text{NOPAT}}{\text{Invested Capital}} \times 100\%$
$\text{Capital Charge} = \text{Invested Capital} \times \text{WACC}$
$\text{Economic Profit (EVA)} = \text{NOPAT} - \text{Capital Charge} = \text{Invested Capital} \times (\text{ROIC} - \text{WACC})$
$\text{Economic Spread} = \text{ROIC} - \text{WACC}$
$\text{EVA-to-NOPAT Conversion} = \frac{\text{Economic Profit}}{\text{NOPAT}} \times 100\%$

An enterprise employs $10,000,000 in invested capital across debt and equity, generating $3,200,000 in EBIT under a 21.0% effective tax rate ($672,000 tax on operations). Its NOPAT is $2,528,000, delivering a 25.28% Return on Invested Capital (ROIC). With a Weighted Average Cost of Capital (WACC) of 8.50%, the enterprise incurs an annual Capital Charge of $850,000 ($10,000,000 × 8.50%). The company produces $1,678,000 in Economic Profit (EVA) ($2,528,000 - $850,000), representing an economic spread of +16.78% (25.28% - 8.50%). Because the enterprise generates returns substantially in excess of its blended financing hurdle, it is an elite institutional wealth creator.

Self-check quiz

1. Why does Economic Profit (EVA) represent a superior measure of shareholder wealth creation compared to accounting net income?

It charges management for the full opportunity cost of equity capital rather than treating equity as free funding

It eliminates corporate income tax liabilities

2. A firm holds $20M in invested capital, generates $2.4M in NOPAT (12% ROIC), and has an 8% WACC. What is its Capital Charge and Economic Profit?

$1.6M Capital Charge ($20M × 8%) and +$800,000 Economic Profit ($2.4M - $1.6M)

$2.4M Capital Charge and $0 Economic Profit

3. What occurs when a company's ROIC is 7.0% and its WACC is 9.0%?

The company has a negative economic spread (-2.0%) and destroys shareholder wealth on every dollar of invested capital

The company achieves AAA investment grade rating

4. How can a business with fixed revenues and costs increase its Economic Profit?

Optimize working capital and liquidate unproductive PP&E to reduce invested capital and lower the dollar capital charge

Increase executive compensation bonuses

Frequently asked questions

What is Capital Charge and how is it calculated?

Capital Charge represents the minimum monetary dollar return required by investors (both debt lenders and equity shareholders) to compensate them for the risk of tying up capital in an enterprise. It is calculated as: Capital Charge = Invested Capital * WACC (Weighted Average Cost of Capital).

How does Economic Profit (EVA) differ from Accounting Net Income?

Accounting net income deducts only the cost of debt (interest expense), treating equity capital as effectively free. Economic Profit (EVA) deducts the full opportunity cost of all invested capital (both debt and equity). An enterprise can report positive accounting profit while simultaneously destroying economic shareholder wealth if ROIC is below WACC.

What is the Economic Spread and why is it critical?

The Economic Spread is the percentage difference between Return on Invested Capital and WACC: Economic Spread = ROIC - WACC. When multiplied by Invested Capital, it yields total annual Economic Profit. A positive spread signals that management is creating shareholder value above investor opportunity costs.

How can management increase Economic Profit (EVA)?

Management can expand EVA through three primary levers: 1) Increasing operating profit margins and capital turnover to boost NOPAT without adding capital, 2) Investing new capital only in projects where expected ROIC exceeds WACC, and 3) Divesting or liquidating underperforming assets whose ROIC falls short of the capital charge hurdle.