Explanations of EVA, MVA and NPV

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Explanations of EVA, MVA and NPV and their relationship with each

other.

The concept of EVA is a measure of economic profit and was popularised

and originally trade-marked by Stern Stewart Consulting Company in the

1980’s. Economic Value Added (EVA) can be defined as the difference

between net operating profit after taxes and the monetary value of a

company’s total cost of capital. Should a company’s profit exceed the

overall costs of funds they create EVA. It can be so important because

EVA is the most efficient internal measure of the true economic profit

of a company. Managers within any company can use this measure in

order to obtain any crucial information they may need when making

crucial decisions. When broken up EVA can simply be defined as an

estimate of the amount by which earnings exceed or fall short of the

required lowest rate of return that shareholders could receive by

investing in the company. The main aim of any company should be to

maximise the wealth of their shareholders, and as put forward by

Stern-Stewart, EVA should be an aid to managers of company’s striving

for this common target. The value of a company can also be easily

judged with the aid of EVA by analysing the extent to which

shareholders expect earnings to exceed or fall short of the total cost

of capital. EVA takes into account the full cost of operating costs

and capital costs including the full cost of equity.

Market Value Added (MVA) is known as the difference betwe...

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