A specific way of calculating residual income is economic value added. Economic value added (EVA)1 is net income (operating income minus taxes) minus the total annual cost of capital. Basically, EVA is residual income with the cost of capital equal to the actual cost of capital for the firm (as opposed to some minimum rate of return desired by the company for other reasons) It is said that if EVA is positive, then the company is creating wealth; if EVA is negative, then the company is destroying wealth. Consider the old saying, “It takes money to make money.” EVA helps the company to determine whether the money it makes is more then the money it takes to make it. Over the long term, only those companies creating capital, or wealth, can survive.