EVA %

Formal

The difference between the IRR of an investment proposal and the business’s own minimum Minimum return (pa%) - with the answer expressed as a percentage. Put differently, it refers to the excess or shortfall in the rate of return generated from a proposal against the company’s own cost of capital. A positive EVA% generates a surplus and therefore is likely to be accepted. A negative means that the cost of funds is higher than the returns so the proposal is likely to be declined.

Straight Talk

Lets assume that you can borrow funds at an annual interest cost of 10%. You have a sure fire scheme that will deliver 15% annual return. Should you borrow the money and make a killing - obviously, yes! An opportunity for profit exists - that’s a positive ‘EVA%’ of 5%. It’s the annual rate of surplus or deficit available from investment proposals.