Certified Supply Chain Professional (CSCP) Practice Exam

What does economic value added measure?

1. The total revenue from sales

2. The profit earned above the cost of capital

3. The market share acquired

4. The return on investment in marketing

The correct answer is: The profit earned above the cost of capital

Economic value added (EVA) is a financial performance metric that measures a company's ability to generate profit above the required return on its capital. In other words, it assesses the profit earned over and above the cost of capital, which includes the cost of equity and debt financing. This concept is crucial in evaluating whether a company is creating value for its shareholders. When calculating EVA, the formula typically involves subtracting the total cost of capital from the net operating profit after tax (NOPAT). A positive EVA indicates that the company is generating enough profits to cover its cost of capital, thus creating value, while a negative EVA suggests the opposite. This metric is particularly useful for investors and management as it provides insight into the true profitability of a business, considering the capital that has been invested. In contrast, the other options measure different aspects of a business's performance, such as revenue, market share, or investment returns, which do not specifically account for the cost of capital in the same way that EVA does.