Economic Value Added - EVA

What Does Economic Value Added - EVA Mean?
A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".)

The formula for calculating EVA is as follows:

= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)

Investopedia explains Economic Value Added - EVA
This measure was devised by Stern Stewart & Co. Economic value added attempts to capture the true economic profit of a company.

Normal Profit

What Does Normal Profit Mean?
When economic profit is equal to zero; this occurs when the difference between total revenue and total cost (explicit and implicit costs) equals zero. Normal profit is different than accounting profit because opportunity cost is taken into consideration. 

Normal profit is the minimum level of profit needed for a company to remain competitive in the market.

Also known as "economic profit".

Investopedia explains Normal Profit
Normal profit occurs at the point at which the resources available to the firm are being efficiently used and could not be put to better use elsewhere. It is important to note that zero economic profit does not mean that the company is not earning any money (accounting profit). It is simply a measure of how well resources are being used relative to all possible options.

Profit Motive

What Does Profit Motive Mean?
The intent to achieve monetary gain in a transaction or material endeavor. Profit motive can also be construed as the underlying reason why a taxpayer or company participates in business activities of any kind. Profit motive must be determined for some transactions to determine the deductibility of any expenses involved.

Investopedia explains Profit Motive
For taxpayers who participate in rental activities, profit motive must be determined in order to claim rental expenses. The IRS may try to prevent a taxpayer from claiming rental losses if a profit motive cannot be proved. Profit motive can be established by proving that a profit was realized in at least three out of the last five years. Profit motive is also what separates a hobby from a business in the eyes of the IRS; hobby losses are nondeductible because there was no intent to make a profit from any gains.

Economic Profit (Or Loss)

What Does Economic Profit (Or Loss) Mean?
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).

Investopedia explains Economic Profit (Or Loss)
Don't confuse this with 'accounting profit', which is what most people generally mean when they refer to profit.

In calculating economic profit, opportunity costs are deducted from revenues earned.  Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit.

For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).