Economic Profit Calculator
Calculate economic profit — the surplus remaining after deducting both explicit accounting costs and the implicit opportunity cost of capital from revenue — to determine whether a business truly creates value beyond its cost of capital.
How to use this tool
- Enter total revenue, total explicit (accounting) costs, total invested capital and opportunity cost rate (wacc) in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your economic profit and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
Accounting Profit = Revenue − Explicit Costs
Opportunity Cost = Invested Capital × Opportunity Cost Rate
Economic Profit = Accounting Profit − Opportunity Cost of Capital
How it works
Economic profit extends traditional accounting profit by also subtracting the implicit opportunity cost of the capital deployed in the business — the return that capital could have earned in its next-best alternative use. It is calculated as revenue minus all explicit costs to get accounting profit, then subtracting the capital charge (invested capital multiplied by the required rate of return, often the WACC). A positive economic profit means the firm is generating returns above and beyond what investors require; a negative economic profit (economic loss) means the firm destroys value even if it shows an accounting profit.
Worked example
Value-creating vs. value-destroying firm
- Revenue = $5,000,000; Explicit Costs = $3,500,000 → Accounting Profit = $1,500,000
- Invested Capital = $4,000,000; Opportunity Rate = 10% → Opportunity Cost = $400,000
- Economic Profit = $1,500,000 − $400,000 = $1,100,000 (value-creating)
Economic Profit = $1,100,000
Common mistakes to avoid
- Using accounting profit alone to judge business success — accounting profit ignores the opportunity cost of equity capital, so a firm can show positive accounting profit while destroying economic value.
- Applying the wrong opportunity cost rate — the rate should reflect what equity holders could earn in an alternative investment of equivalent risk, typically the cost of equity (CAPM), not a risk-free rate.
- Double-counting interest by subtracting interest expense to get accounting profit and then also deducting the opportunity cost of total capital (including debt); use either an all-equity WACC approach or adjust consistently.
Key terms
- What is economic profit?
- Economic profit is accounting profit minus the opportunity cost of all capital invested. It measures whether a firm earns returns above the minimum required by investors.
- How does economic profit differ from accounting profit?
- Accounting profit deducts only explicit (cash) costs. Economic profit also deducts the implicit opportunity cost of equity capital, giving a fuller picture of value creation.
- What is opportunity cost of capital?
- It is the return that investors forgo by committing their capital to this business rather than the next-best alternative investment of comparable risk.
- Can a firm show an accounting profit but an economic loss?
- Yes. If accounting profit is positive but smaller than the opportunity cost of capital, the firm earns an economic loss — it would have been better off deploying capital elsewhere.
Frequently asked questions
- How is economic profit different from accounting profit?
- Accounting profit deducts only explicit (cash) costs. Economic profit also deducts the implicit opportunity cost of equity capital, so it measures whether a business exceeds its investors' required return.
- Can a company be profitable accounting-wise but destroy economic value?
- Yes. If the return on invested capital is below the cost of capital, economic profit is negative even when accounting profit is positive.
- Is economic profit the same as EVA?
- They are closely related. EVA (Economic Value Added) is a specific branded implementation of economic profit that starts from NOPAT and deducts a capital charge equal to invested capital times WACC.