ECONOMIC VALUE ADDED (EVA)

MANAGEMENT CONTROL SYSTEM

ASSIGNMENT II
Presented By
Deepak Jain
Roll no : 34
LLIM
 INTRODUCTION

 Economic Value Added is the financial

performance measure that comes closer than any
other to capturing the true economic profit of an
enterprise.

 EVA also is the performance measure

most directly linked to the creation of
shareholder wealth over time.
 How to Calculate EVA ?

EVA = Operating Profit - Opportunity Cost of Running the Business

Cost of Borrowing?
 Sales
– Cost of Sales
– Overhead
 EBIT The return (or expectation) foregone
– Tax on by not investing in a comparably
Operations risky portfolio of projects—the
 NOPAT weighted cost of debt and equity
capital.

Opp. Cost = Cost of Capital

x Beg. Capital
 NOPAT

 Net Operating Profit after tax before exceptional items and

interest i.e. NOPAT =(Profit after Tax + Non-Recurring
Expenses + Revenue Expenditure on R&D + Interest Expenses +
Provision for Taxes) – (Non Recurring Income + R&D
Amortization + cash operating Taxes)
 Cash operating Taxes (Provision for Taxes + Tax benefit of non
recurring expenses + Tax benefit of interest expenses - Tax on
non-recurring Income)

CAPITAL EMPLOYED

 Net Fixed Assets + Investment +Current Assets – (Miscellaneous

Expenditure not written off + Intangible Assets + Cumulative
Non-Recurring Losses + Capital Expenditure on R&D) –
Revaluation reserve – Cumulative Non-Recurring Gains.
 WACC

 WACC (Ko) = Ke (weight of equity Capital+ free reserve) +Kd

(weight of long-term Debt)

 For calculating ‘Ke’ Capital Assets pricing Model (CAPM) is

used

 Ke = Rf +Rc (R m + Rf )

Ke = Cost of Equity
Rf = Risk free return
Rm = expected market rate of return
Rc = Risk coefficient of particular investment
 What Does EVA Show?

 +Ve The Company has Managed to create Shareholder Value

 Zero This should be treated as the Shareholders have earned a
return that compensates the risk
 -Ve The Company has destroyed the Shareholder Value.

Usage of EVA ???

 EVA
• Bonus to employee
• Extra remuneration to management
• Incentive dividend to preference shareholders
• Bonus shares to equity shareholders
 Setting organization goal
 Performance measurement
 Motivation of manager
 Corporate valuation
 Communication with shareholder & Investor