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Anonymous A
on Feb 25, 2025
Global
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Why do we calculate with EBIT and not NOPAT when calculating EVA = EBIT - CE*WACC?

Hi, my accounting background isn't very strong and my question is: 
in Question 2A We are being asked to calculate the EVA (Economic value added)
EVA = EBIT - CE*WACC
But why not 
EVA = NOPAT- CE*WACC?

Is it because EBIT is being provided in the study and NOPAT isn't?

Thanks in advance!

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Sebastian
Coach
on Feb 25, 2025
Ex-BCG Principal & Senior Recruiter in Germany | 300+ real recruiting interviews at BCG | Free 15min intro call

Hi there, 

you are technically right. EVA reflects the true economic profit/return to both debt and equity holders. Hence, we need to account for taxes while not considering the interest (as this is the debt holders return) --> NOPAT 

However, you will encounter in many Consulting interviews that it is rather about testing the overarching concept than being precisely right. Hence, for simplicity they use EBIT here. If I would interview you, I would give you bonus points for pointing out that NOPAT would be better though ;) 

Keep in mind that a lot of interviews are more about being 80:20 but fast :) 

Best, 
Sebastian 

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Alessa
Coach
on Feb 25, 2025
xMcKinsey & Company | xBCG | xRB | >400 coachings | feel free to schedule an intro call for free

Hey there ?, we typically use EBIT in the EVA calculation because it represents the operating profit before the effects of financing and taxes, allowing for a more consistent comparison of operational performance. If you used NOPAT, which is after-tax profit, you'd have to account for tax effects separately, and it might not align as cleanly with the capital charge (CE * WACC) provided. In many studies, they use EBIT simply because that's the figure available and it keeps the analysis straightforward. Best, Alessa ?

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Pedro
Coach
on Feb 28, 2025
Bain | EY-Parthenon | Former Principal | 1.5h session | 30% discount 1st session

You are technically correct. EBIT is an approximation, whereas NOPAT is the right way to calculate.

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