Calculator: Adding Up the Real Value of Capital Costs

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.

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.