by CIO Staff

Do the EVA Math

News
Jan 15, 20031 min
IT Leadership

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