The Economic Value Added (EVA) measures the true economic value of an investment based on residual capital. It is calculated by subtracting the opportunity cost of capital from the company’s net operating profit after tax. In a sense, EVA is the net present value of a project in capital budgeting.
The concept behind EVA is to measure performance based on the value added during the period. It measures how a shareholder’s capital is performing based on other potential investment and is thus directly linked to shareholder’s wealth.