A Comparison of EVA and NPV - 3878 Words

Running head: A COMPARISON OF EVA AND NPV A Comparison of EVA and NPV (discuss the differences and similarity of EVA and NPV; why would companies choose to adopt EVA, implementation issues; chronicle the implementation experience of EVA on a real life company). 1 A COMPARISON OF EVA AND NPV 2 A Comparison of EVA and NPV (discuss the differences and similarity of EVA and NPV; why would companies choose to adopt EVA, implementation issues; chronicle the implementation experience of EVA on a real life company). Finance executives are required not only to crunch numbers and generate forecast but to think ‘critically’, not just seeing the numbers but understanding their implications. This is what Melon (1994)†¦show more content†¦EVA a New financial performance metric Figure 1. EVA a New financial performance metric. (Weaver, 2001, p.50) Figure2. Calculation of EVA per year t Figure2. Calculation of EVA per year t. (Baran et al., 2007, p. 670) Notes: Net Operating Assets – NOA According to Baran et al. (2007), â€Å"it is desirable for EVA to be positive or at [the very] least zero; the higher the value of the indicator of EVA the higher the value created [for the company stockholders]† (Baran et al., 2007, p. 673). A COMPARISON OF EVA AND NPV 5 Defining NPV; its role, application and calculation: Dilon and Owers (1997) states that, â€Å"Net Present Value (NPV) also referred to as the additional market value is generally considered a sound measure of value created† (Dilon Owers, 1997, p. 34). The discounted value of future cash flow (FCFi), expected of a project over its lifetime less the value of the company’s initial capital investment (lo), NPV is considered to be linked to stock prices. Dilon and Owers (1997) argues that, if the acceptance of capital project by a ‘non-regulated’ firm resulted in an increase in stock prices then, if the assumption is made, that the accepted projects were examined using NPV, positive NPV equated to the creation of market value. (Armeanu Lache, 2009, p. 144; Dilon Owers, 1997, p. 34) According to Armeanu and Lache (2009): The NPV criterion is based on the hypothesis of an unsaturated money market, according to which theShow MoreRelatedEva -Economic Value Added10189 Words   |  41 Pages9-206-016 REV: JULY 11, 2006 MIHIR A. DESAI FABRIZIO FERRI Understanding Economic Value Added EVA is based on something we have known for a long time: what we generally call profits, the money left to service equity, is usually not profit at all. Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes as if it had a genuine profit. 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