Calculator: Adding Up the Real Value of Capital Costs

By David F. Carr  |  Posted 2003-01-21 Print this article Print

Evaluate the hidden capital costs of technology investments through Stern Stewart's Economic Value Added (EVA) calculator.

BigCorp Inc. invests $1 million in a magic server that instantly produces $100,000 in revenue each year while adding only $50,000 in annual operating costs. After taxes, the operating profit is $45,000.

XLS Download But what about the $1 million? That expense is categorized as a capital cost and is amortized over several years. If BigCorp is rewarded on the basis of operating profit, the new server looks like a clear win. The picture changes, however, if the project is evaluated through the lens of Economic Value Added (EVA), which tries to ferret out hidden costs. Although Stern Stewart, the methodology's creator, keeps some elements proprietary, the basic formula, below, is public. Fill in your numbers in our digital version.

David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.

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