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The Capital Charge is the absolute dollar value that is expected by investors as a book return on the capital provided. This amount is derived by multiplying invested capital with the cost of capital. There are two methods of calculating invested capital:

• The Entity Method: Invested capital is the sum of equity and debt with cash and cash equivalents subtracted. This method is used by companies where financing is not part of business operations (see also the Non-Financials Value Driver Tree).
• The Equity Method: Invested capital equals book equity. This method is used by companies where financing is part of business operations, such as banks, insurance companies and real estate developers (see also the Financials Value Driver Tree).

Capital Charge is used to calculate EVA.

Click here for the following section on EVA sub-metrics: the Value Driver Tree.
Click here for the final VBM section on value-based incentive compensation.

Click here for more information about EVA Adjustments.
Click here for more information about Tax Treatment in EVA.
Click here for more information about calculating Cost of Capital.
 

Recommended Readings: EVA by Stephen F. O'Byrne, Competitive Value Management by Hermann J. Stern