Economic Value Added (EVA)
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This paper explains Economic Value Added (EVA), an economic performance metric that is used for calculating the net dollar return to shareholders of a company after the cost of capital. The paper explains how to calculate EVA and discusses its pros and cons. The paper also discusses how EVA is used and who uses it.
From the Paper:"Simply stated, accounting profit is revenue minus expenses. So, for example, if a company has revenues of $100mm and expenses of $98mm, its profit is $2mm. However, what is not considered in this equation is the opportunity cost of capital that's tied up in operations. Accounting profit, therefore, does not completely measure the net return to shareholders. EVA does assume the cost of capital and measures the economic profit/loss above or below the hurdle rate or minimum rate of return. In the example above, if the cost of capital was $3mm, the company's economic loss would be -$1mm. So it is possible for a company to have a positive accounting profit, yet a negative economic profit."
Sample of Sources Used:
- www.evanomics.com/evastudy - Study: EVA as a management tool. Helsinki School of Economics and Business Administration.
- Red Herring - "Economic Value Added theory provides a new way to value companies. Where does high-tech fit in?" Jan 1, 1998.
- www.computerworld.com ROI Guide: Economic Value Added. John Berry. Feb. 17 2003.
- www.computerworld.com Economic value added: A better measure of finances? Dawne Shand. Oct. 30, 2000.
- "Is Economic Value Added Stunting Your Growth? Learn to measure your Real Options." Jeffrey Greene.
Cite this Research Paper:
Economic Value Added (EVA) (2010, February 15) Retrieved January 22, 2020, from https://www.academon.com/research-paper/economic-value-added-eva-118668/
"Economic Value Added (EVA)" 15 February 2010. Web. 22 January. 2020. <https://www.academon.com/research-paper/economic-value-added-eva-118668/>