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Entrepreneurship and Startup · Value Addition

Measuring Value Addition and Economic Value Added (EVA)

Updated 11 October 2026 · Fact-checked

Value added is the value a business creates over the cost of what it buys from outside: Value Added = Sales value − Cost of bought-in inputs. Gross value added is before depreciation; net value added is after it. EVA = NOPAT − (Capital employed × WACC). Positive EVA means real wealth is created.

Understand Measuring Value Addition and Economic Value Added

Every business buys materials and services from outside, then turns them into something customers pay for. The gap between what customers pay and what the business paid outsiders is the value added. It is the value the business itself created through its people, machines, capital and ideas.

This gap is then shared. Employees get wages, lenders get interest, government gets taxes, owners get profit, and some is kept back for replacing assets and growth. That is why value added is a better measure of a startup's contribution than profit alone.

Gross value added (GVA) is output minus bought-in inputs, with no deduction for depreciation. Net value added (NVA) deducts depreciation too, because the assets used up in production are a cost to the business. So NVA = GVA − depreciation.

Economic Value Added (EVA) goes one step further. Accounting profit ignores the cost of the owners' money. EVA charges for all capital, debt and equity. If operating profit after tax does not cover that charge, the business has not truly created value, even if it shows an accounting profit.

Cost-benefit measures compare the value created with the cost of creating it, for example benefit-cost ratio = total benefits ÷ total costs. A ratio above 1 means benefits exceed costs. Use it when a project or process change is judged on value created.

Key rules to remember

Value added
Value added = Sales value (output) − Cost of bought-in materials and services
Wages, interest, rent paid to owners of factors and profit are not deducted. They are shares of value added.
Gross value added (GVA)
GVA = Output − Bought-in inputs
Before depreciation.
Net value added (NVA)
NVA = GVA − Depreciation
Depreciation is the capital consumed in production.
Distribution of value added
NVA = Wages + Interest + Taxes + Dividends + Retained profit
Use it to cross-check. Add depreciation to reach GVA.
NOPAT
NOPAT = Operating profit (EBIT) × (1 − Tax rate)
Profit from operations after tax, before financing cost.
Capital charge
Capital charge = Capital employed × WACC
WACC is the weighted average cost of debt and equity.
Economic Value Added
EVA = NOPAT − (Capital employed × WACC)
Positive EVA creates value. Negative EVA destroys it.
Benefit-cost ratio
BCR = Total benefits ÷ Total costs
Above 1 means benefits exceed costs. Use present values if benefits arise over several years.

How to solve Measuring Value Addition and Economic Value Added questions

Identify which measure the question asks for, then build it from clean components.

  1. 1Read the question and mark the measure asked: value added, GVA, NVA, EVA or benefit-cost ratio.
  2. 2List the data and sort it into output, bought-in inputs, depreciation, operating profit, tax and capital.
  3. 3For value added, take sales (or output) and deduct only bought-in materials and services from outsiders.
  4. 4Deduct depreciation from GVA only if NVA is asked.
  5. 5For EVA, compute NOPAT first, then the capital charge using the capital employed and WACC given.
  6. 6Subtract the charge from NOPAT and state whether EVA is positive or negative.
  7. 7Cross-check by adding the shares of value added if they are given, and write one line of interpretation or recommendation.

Quickest way: Three-line check for GVA, NVA and EVA

When to use it: Use for MCQs and short numerical parts where the data is clean.

  1. GVA: output minus outside purchases. Ignore wages, interest and profit.
  2. NVA: GVA minus depreciation.
  3. EVA: EBIT × (1 − t) minus capital employed × WACC. Check the sign and say what it means.

Common mistakes in Measuring Value Addition and Economic Value Added

  • Deducting wages and interest while computing value added

    Students treat value added like profit.

    Fix: Deduct only bought-in inputs. Wages, interest and profit are shares of value added.

  • Confusing GVA with NVA

    Depreciation is easy to overlook in a long data list.

    Fix: GVA is before depreciation. NVA is after. Check the question's word.

  • Using pre-tax profit in EVA

    Students take EBIT straight from the data.

    Fix: Use NOPAT = EBIT × (1 − tax rate).

  • Charging only equity or only debt cost on capital

    Students think of interest as the only cost of capital.

    Fix: Apply the WACC to the total capital employed, unless the question gives a different method.

  • Stopping at the number without interpretation

    Students treat it as a pure calculation.

    Fix: Add one line: positive EVA means value created for providers of capital, negative means value destroyed.

Worked examples

Example 1

A startup, FreshBasket Foods Pvt Ltd, has sales of ₹80,00,000. It bought raw materials worth ₹36,00,000 and outside services worth ₹8,00,000. Depreciation is ₹4,00,000. Wages are ₹18,00,000. Find GVA, NVA, and the profit and other shares if interest is ₹3,00,000 and taxes are ₹2,00,000.

Show the solution
  1. Bought-in inputs = 36,00,000 + 8,00,000 = ₹44,00,000.
  2. GVA = 80,00,000 − 44,00,000 = ₹36,00,000.
  3. NVA = 36,00,000 − 4,00,000 = ₹32,00,000.
  4. Shares other than profit = wages 18,00,000 + interest 3,00,000 + taxes 2,00,000 = ₹23,00,000.
  5. Profit (before dividends and retention) = 32,00,000 − 23,00,000 = ₹9,00,000.

Answer: GVA = ₹36,00,000; NVA = ₹32,00,000; profit available to owners = ₹9,00,000.

Example 2

Kaveri Tech Ltd has EBIT of ₹50,00,000, a tax rate of 25%, capital employed of ₹2,00,00,000 and WACC of 12%. Compute EVA and comment.

Show the solution
  1. NOPAT = 50,00,000 × (1 − 0.25) = ₹37,50,000.
  2. Capital charge = 2,00,00,000 × 12% = ₹24,00,000.
  3. EVA = 37,50,000 − 24,00,000 = ₹13,50,000.
  4. EVA is positive.

Answer: EVA = ₹13,50,000. The company earns more than the cost of its capital, so it creates value for its capital providers.

Exam tips

  • Read whether the question says gross or net. One word changes the answer by the depreciation amount.
  • For EVA, show NOPAT and capital charge as separate lines so you earn step marks even if one figure slips.
  • Always add a one-line conclusion on value creation. Case questions reward the recommendation.
  • In MCQs, check the distractors: they often include the answer with wages deducted or with pre-tax profit.

Practice questions from Value Addition

Measuring Value Addition and Economic Value Added in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Measuring Value Addition and Economic Value Added: frequently asked questions

What is the formula for value added?

Value added = Sales value − Cost of bought-in materials and services. Wages, interest and profit are not deducted, because they are the shares into which value added is divided.

What is the difference between gross and net value added?

Gross value added is output less bought-in inputs. Net value added also deducts depreciation. So NVA = GVA − depreciation.

What is the EVA formula?

EVA = NOPAT − (Capital employed × WACC). NOPAT is EBIT × (1 − tax rate). A positive result means the business earned more than the cost of its capital.

Can a business have positive profit and negative EVA?

Yes. Accounting profit does not charge for the cost of equity. If profit after tax from operations is less than the capital charge, EVA is negative even though the books show a profit.