Economic value added is defined as:
A)the same as accounting profit.
B)total revenue less total explicit costs.
C)accounting profit net of the minimum return on invested capital demanded by the firm's investors.
D)the same as economic profit.

Question

Quizplus · Accepted Answer

Economic value added (EVA) is the profit earned by a company after accounting for the cost of all capital, including equity and debt. It is calculated as the difference between the net operating profit after tax (NOPAT) and the cost of capital. Unlike accounting profit, EVA deducts the minimum rate of return demanded by investors for the use of their capital. Therefore, option C is the correct answer. Option A is incorrect because accounting profit does not consider the cost of capital. Option B is incorrect because it only considers explicit costs, not the cost of capital. Option D is also incorrect because economic profit is calculated by deducting both explicit and implicit costs from total revenue. Economic value added (EVA) is the measure of a company's financial performance that calculates the difference between the return on invested capital (ROIC) and the cost of capital. It is the amount of profit earned by a company over and above the minimum return that investors require, which is typically based on the cost of capital. EVA is different from accounting profit as it considers the cost of capital in the calculation. Therefore, the correct answer is C.

Economic Value Added Is Defined As