Economic Profit Calculator
Enter your revenue and costs to find your economic profit, the true surplus left after paying every resource its full opportunity cost. Switch between the microeconomic view (explicit costs plus implicit costs) and the corporate finance view (EVA: NOPAT minus the cost of invested capital). Results update instantly as you type.
Formula
Worked example
Microeconomic example: A bakery earns $500,000 in revenue. Explicit costs (wages, rent, supplies) total $320,000. The owner also forfeits a $60,000 salary they could earn elsewhere and $20,000 in foregone investment returns on their capital. Total implicit costs: $80,000. Accounting profit = $500,000 - $320,000 = $180,000. Economic profit = $500,000 - $320,000 - $80,000 = $100,000. EVA example: A company has EBIT of $80,000, a 21% tax rate (NOPAT = $63,200), $400,000 of invested capital, and WACC of 10%. Capital charge = $40,000. EVA = $63,200 - $40,000 = $23,200.
What is economic profit?
Economic profit is the surplus left after subtracting both explicit costs (cash outflows like wages, rent and materials) and implicit costs (the value of the best alternative use of your resources). It is also called pure profit or supernormal profit. Unlike accounting profit, which only deducts actual expenditures, economic profit counts the opportunity cost of every resource: your time, your capital, your property. If economic profit is positive, the activity is the best use of your resources. If it is zero, you are earning a "normal profit" where all alternatives are exactly compensated. If it is negative, you would be better off in another activity even if accounting profit is positive.
The two formulas: microeconomic and corporate EVA
The microeconomic formula is straightforward: Economic Profit = Total Revenue - Explicit Costs - Implicit Costs. Explicit costs are anything paid in cash (salaries, rent, raw materials). Implicit costs are opportunity costs not requiring a direct payment: the salary you could earn elsewhere if you own the business, the investment return you could have earned on your own capital, or the rental income you forgo by using your own property. The corporate finance equivalent is Economic Value Added (EVA), developed by Stern Stewart: EVA = NOPAT - (Invested Capital x WACC). NOPAT is EBIT multiplied by (1 minus the tax rate). Invested Capital is fixed assets plus net working capital. WACC is the blended required return of all capital providers. Both formulas reach the same idea from different angles: genuine value is only created when returns exceed every cost including the cost of alternatives.
Economic profit vs accounting profit: why the gap matters
Consider a business owner who earns $120,000 in accounting profit but could earn $90,000 salary working elsewhere and could earn $40,000 by investing their business capital in the stock market. Total implicit costs are $130,000. Economic profit is $120,000 - $130,000 = -$10,000. The business looks profitable on paper but is actually destroying value relative to the alternatives. This gap is precisely what economic profit reveals. It is why economists say that in a perfectly competitive market, economic profit trends toward zero: above-normal returns attract competitors who bid away the surplus. Persistent positive economic profit signals a genuine competitive advantage.
ROIC, WACC and the value spread in corporate finance
For publicly traded companies the preferred framework is EVA. ROIC (Return on Invested Capital) is NOPAT divided by invested capital, the after-tax operating return on every dollar deployed. WACC (Weighted Average Cost of Capital) is the blended required return of debt and equity holders, typically 7-12% for established companies. The value spread (ROIC minus WACC) tells you how fast value is created or destroyed per dollar of capital. Multiply the spread by invested capital to get EVA, which equals economic profit in the corporate context. A company with ROIC above WACC is building intrinsic value: equity holders are getting more than their required return. A company with ROIC below WACC should shrink, divest, or return capital because growth destroys value.
Economic Profit vs Accounting Profit: Key Differences
| Aspect | Accounting Profit | Economic Profit |
|---|---|---|
| Costs subtracted | Explicit costs only | Explicit + implicit costs |
| Opportunity costs | Ignored | Included |
| Standard used by | Accountants, tax authorities | Economists, value-based management |
| Can be positive when... | Revenue > explicit costs | Revenue > all opportunity costs |
| Zero profit means | Breaking even on cash | Normal profit: all alternatives exactly covered |
| Negative profit means | Cash loss | Would be better off in an alternative use of resources |
| Corporate equivalent | Net Income / Operating Income | EVA (Economic Value Added) |
Understanding why these two measures diverge and when each is the right lens.
Frequently asked questions
What is the difference between economic profit and accounting profit?
Accounting profit deducts only explicit costs: amounts actually paid in cash. Economic profit also deducts implicit costs, the value of what you gave up to pursue this activity. A business that earns $80,000 in accounting profit but whose owner could have earned $90,000 elsewhere has a negative economic profit of -$10,000. Accounting profit answers "did we make money?" Economic profit answers "was this the best use of our resources?"
Can economic profit be positive when accounting profit is negative?
Rarely, but in theory yes. If implicit costs were large negative values (hard to imagine in practice), it could happen. In most real situations, if accounting profit is negative, economic profit is even more negative because economic costs are always at least as large as accounting costs.
What does zero economic profit mean?
Zero economic profit is called "normal profit." It means the business exactly covers all costs including the opportunity cost of every resource: the owner earns what they could earn elsewhere, the capital earns its required return, any property earns its market rental rate. Zero economic profit does not mean the business is failing: it means it is exactly as attractive as the next-best alternative.
What is EVA and how does it relate to economic profit?
EVA (Economic Value Added) is the corporate finance version of economic profit. It equals NOPAT (Net Operating Profit After Tax, which is EBIT times one minus the tax rate) minus a capital charge (invested capital times WACC). WACC is the weighted average cost of capital, the blended required return of all capital providers. A positive EVA means the business earns more than its cost of capital and is creating value. A negative EVA means it is destroying value even if net income is positive.
What are implicit costs and how do I estimate them?
Implicit costs are the foregone value of your next-best alternatives. The three most common: (1) foregone salary, the compensation you could earn in your next-best employment; (2) foregone return on invested capital, typically estimated using the risk-adjusted market return or your WACC; and (3) foregone rent on property you own and use rather than leasing out. For a corporate analyst, implicit costs are captured by the WACC-based capital charge in the EVA formula.
Why does economic profit tend toward zero in competitive markets?
Positive economic profit signals that a market is generating above-normal returns. This attracts new entrants who expand supply, pushing prices down and driving up input costs as they compete for labor and materials. The process continues until economic profit reaches zero, the long-run equilibrium in a perfectly competitive market. Persistent positive economic profit therefore implies some form of competitive advantage: a patent, a network effect, a cost advantage, or a regulatory barrier.
How should I choose between the microeconomic and EVA calculators?
Use the microeconomic mode when evaluating a small business, a side project, or a personal decision where you can identify concrete opportunity costs like a foregone salary or foregone investment return. Use the EVA mode when analyzing a corporation that files financial statements: you have EBIT in the income statement, capital on the balance sheet, and you can estimate WACC from the capital structure and market data.