Economic Value Added

What is EVA?
EVA (Economic Value Added) is one variation of residual income which is defined as operating harvesting subtracted with capital weigh down. EVA then measures whether the operating profits is decent compared to the total speak tos of capital employed. It is also a measure of NPV that is used to measure, reward, and improve performance within a firm. EVA was defined by Stewart as Net operating profit after taxes (NOPAT) subtracted with a capital charge. Basically, EVA measures wither shareholders earned enough return to compensate the risk taken. The idea is that value is created when the return on the firms economic capital employed is greater than the cost of that capital.
EVA = NOPAT crownwork COST
EVA = NOPAT COST OF CAPITAL x CAPITAL employed
EVA = (RATE OF RETURN COST OF CAPITAL) x CAPITAL
Where:
1. swan of return = Nopat/Capital
2. Capital = Total balance tabloid minus non-interest bearing debt in the beginning of the year
3. woo of capital = Cost of Equity x Proportion of fairness from capital + Cost of debt x Proportion of debt from capital x (1-tax rate).

What are the advantages and disadvantages of using EVA as a management pawn?
Like any other management tool, EVA has some advantages and disadvantages.




Advantages of EVA:
Provides for meliorate assessment of ratiocinations that affect balance sheet and income statement or tradeoffs between each through the use of the capital charge against NOPAT
Decouples bonus plans from budgetary targets
Covers all aspects of the business cycle
Aligns and speeds decision making, and enhances communication and teamwork
Eliminates economic distortions of GAAP to focus decisions on significant economic results
Disadvantages of EVA:

Helps the company monitoring weak areas and winning strict action to improve them.
Does not measure present value
Rewards taking project with quick paybacks and penalizes taking projects with longer payback period. That is, EVA dishonor the return in the...If you want to get a entire essay, order it on our website: Orderessay



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