Compare the results when traditional ROI and EVA analyses are applied to the following example. Consider a $50,000 investment in software that returns $8,000 in benefits after costs are deducted.
Traditional analysis results in an ROI of 16 percent.
However, EVA analysis requires accounting for the cost of the $50,000 capital. At a hypothetical rate of 12 percent, the result is a lower but more accurate ROI of 4 percent. EVA = the Net Operating Profit After Taxes (NOPAT) – (Capital x Cost of Capital).
$8,000/$50,000 = 16%
benefits
amount of investment
return on investment
$8,000-($50,000×12%) = $2,000
NOPAT
Capital
real benefits (taking into account the cost of capital)
$2,000/$50,000 = 4%
benefits
amount of investment
return on investment
