Economic Value Added EVA

Running head: ECONOMIC VALUE ADDED (EVA) 1

Economic Value Added (EVA)

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ECONOMIC VALUE ADDED (EVA) 2

All firms have similar objectives regarding the approach of earning rate and obtaining

capital of return, thus surpassing the return provided by other firms of investment funds. In

organizations, Economic Value Added (EVA) is an essential tool for measuring the sum of

capital in dollars a company is obtaining after the price tag of investment is deducted. EVA is a

tool that is applied in the financial management system, and the tool is used to allow employees

and managers in the organization to concentrate on how money is distributed in the company and

the cash flow that is generated from it. EVA can also be applied to holding firm responsible for

all financial layouts (Das & Pramanik, 2009). This application is possible because Economic

Value Added creates financial statements such as balance sheet that include all the expenditures

taking place in the organization.

Economic Value Added statements develop financial statement results, success, and

reporting because there are advantages from concentrating on the expansion in the Economic

Added Value. This is because the concentration or the focus of the organization’s attention

regards its essential responsibilities, which is escalating shareholder’s cost and wealth. This frees

the organization to use more periods in identifying strategies to increasing EVA, thus producing

additional value for the shareholders (Swain & Mishra, 2002).

Also, EVA is an essential tool since it creates a verbal communication and improving the

firm’s financial statement, thus allowing firms to make long-term decisions. Accountants from

firms portray statements of income by beginning with an organization’s incomes and abstracting

operational and other related outlays. However, the outlay of the money contributed by the firm

from different shareholders is not regarded on the financial statement. As a result, it is

recommended for the company to establish the earned or obtained income as the profit of the

company after abstracting cost of capital and other related costs.

ECONOMIC VALUE ADDED (EVA) 3

The firm price tag of funds is the predictable return on the selection of all the firm’s

accessible securities. Therefore, it is the aspect of the opportunity cost of money for the venture

in the company’s assets, thus leading to the suitable rate of discount for the company’s average-

risk plans (John, 2009). If the company does not have any issue such as the existence of

outstanding debt, the firm’s price tag of capital is, therefore, the expectable return rate on the

company’s stock. Each plan is required to be evaluated regarding its opportunity cost of capital.

Problems related with EVA

The issue related with the Economic Value Added is that the tool does not have a

clarification for growth opportunities and real options inbuilt in outlay decisions. Besides, the

tool does not consider the perception of the market of the worth of growth opportunities.

Economic Value Added is most suitable for the evaluation of firms with little growth

opportunities and wide-ranging assets. If the firm has more assets, there will be greater

opportunities for the firm to generate a large Economic Value Added. For example, the manager

of a small partition may be greatly knowledgeable, but if that partition has little assets, the firm is

unlikely to grade high in the Economic Value Added stakes. Also, optimization of the firm’s

approach for the value establishment needs maximum commitment. This need extensive

communication and training with any person in the firm (Ehrbar, 1999).

In conclusion, organizations are required to appreciate the need of the Economic Value

Added since the tool play an essential role in the examination of the financial statements. The

organizations are required to understand that successful application of the tool plays a key role in

improving the firm’s financial status regardless of the related issues.

ECONOMIC VALUE ADDED (EVA) 4

References

Das, B., & Pramanik, A. K. (2009). Economic Value Added. New Delhi: Deep & Deep

Publications.

Ehrbar, A. (1999). EVA Economic Value Added (EVA). Doi:10.1007/978-3-322-90967-1

John, P. M. (2009). Economic Value Added (EVA): The relationship with share value.

Swain, N., & Mishra, C. S. (2002). Economic value added: Concepts and cases. Hyderabad,

India: ICFAI University.

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