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The Strengths, Weaknesses and Uses of the Economic Value Added (EVA) Mode
Finance & Accounting
Pages 7 (1757 words)
In the recent years, new arrivals techniques pertaining to performance measurement have gained plenty of financial managers’ attention and appreciation. Those techniques include “Residual Income”, “ROE”, “ROCE” “EVA” etc. However, every technique has its own strengths and weaknesses.
Economic Value Added (EVA) EVA is a relatively new technique of measuring financial performance of companies. This tool relies on three basic elements which are Net Operating Income adjusted after taxes (NOPAT), the investment amount and the weighted average cost of capital (Hansen & Mowen, 1997). EVA can be calculated as: EVA = After tax operating income – (investment in assets x weighted average cost of capital) The amount calculated under EVA is an absolute dollar amount. The amount calculated can be either have a positive value or can have negative value. The positive value shows that the organization has remained successful in generating more Net Operating Income After Tax (NOPAT), well covering the cost of investments that were employed. On the other hand, negative values shows organization’s failure in recovering the costs of investment as its cost of investments exceeded the Net Operating Income After Tax (NOPAT). Obtaining the positive value of EVA is the core objective of any organization. Strengths of EVA EVA has significant strengths which have increased its popularity tremendously. In the following discussion, more attention will paid on different aspects of EVA. 1. Better Measure EVA has turned out to be a better measure in terms of performance measurement of different stakeholders in organizations. ...
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