We have explained all of the underlying components for calculating EVA. Now it comes full circle back to the formula in Exhibit 5.4. Staying with the Pontrelli Recycling example, it is possible to test if EVA was created for 2010. The formula from Exhibit 5.4 is EVA = NOPAT − Capital Charge. The formula from Exhibit 5.5 is Capital Charge = WACC · Beginning Capital. Exhibit 5.3 indicates that the WACC for Pontrelli Recycling is 13.95 percent. Exhibit 2.5 indicates that beginning stockholders' equity was $3,055,166. Exhibit 5.18 indicates the calculation for capital charge.
The capital charge is the minimum amount of profit that your client should generate for the stockholders and lenders for the amount of risk undertaken in advancing monies for equity or debt. Accordingly, the project manager needs to be cognizant of this charge. The more the client makes over its capital charge, the more valuable the company becomes.
Exhibit 2.5 indicates that Pontrelli Recycling's net income for 2010 was $1,681,483. NOPAT is an acronym for net operating profit after taxes (before interest expense). A word of caution is warranted here. Remember that the after-tax cost of the debt is already accounted for in the capital charge through WACC. Net income includes interest accrued to the lenders in 2010. The reason for NOPAT is to avoid ...