ECONOMIC VALUE ADDED

EVA is a measurement tool design to strenghten campanies return on capital investments. a study of best practices in EVA reveals that the metric can help reduce capital costs and improve gross revenues.

Effective decesion making is an important organizational and management process which leads to overall effective and healthy performance of any business. further effective and healthy performance of any business is measured by its positive financial performance. over the past years, global economic devlopments have shifted the effciency equation from measurement by accounting by economic profits. there has been an emphasis on the effect of newly emerged intensely complex, competitive environment on the indivisual businesses and whole market as such. the organizations have learned to maintain andsustain competitive advantage in the commercial market by providing superior value to the customers.

From a commercial standpoint, ECONOMIC VALUE ADDED is the most successful performance metric used by companies and their consultants . although much of its popularity is a result of able marketing and deployment by stern stewart, owner of the trademark, the metric is justified by financial theory and consistent with valuation principles, which are important to any investor's analysis of a company

Some analyst have called economic value added the key to creating corporate wealth. the metric which measures a company's net operating profit after taxes, focuses organizations on earning a target rate of return over and above the cost of capital. this target or" bogie" as its frequently called, is what the business considered the minimum amount of return neccesary to generate positive value from a capital investment. forecasts about how much income an asset is likely to genrate.

example- sales managers' estimates of how much revenue the purchases will create- help corporate decesion making determine whether to buy the asset. the real value of EVA, proponents claim, lies in using it as a framework for a complete financial management and incentive compensation system. yet most of corporate america views it as just anather performance metric among many.

SCOPE
diffrent indusrries and economic sectors are in diffrent stages of EVA development and application. study shows that manufacturing firms accounted for 31%of the total organizations that have implemented EVA. application of EVA in various industries at their various stages of development can be grouped into four classes as discussed below:
. firms which have adopted the underlying principles and have embarked upon broad based implementation of these these concepts.
.firms, which have adopted various value based analytical concepts and techniques but have not gone for broader aspects of its implementation.
. firms, which falsely focus themselves as value based enterprises but their actions, are quite contrary to the value based approach.

Firms that have not adopted EVA at any level of its functional development like agriculture, construction, financial services, food and other services organization and retailers etc.

RATIONALE

one of the most important purpose of any business to produce positive financial results which can be achieved mainly by the success of business in.

. customer market: more and more people buy the products provided by the business organization. organization is able to create a brand name , goodwill and an
impression in customers mind.

. capital market: funds for the organization are procured at minimum cost and funds of the organization are reinvested to generate maximum profit. The funds invested into the company by the shayerholders are commercially utilized by the same to earn revenues greater an the cost of above funds. cost of fund covers the risk the diffrent borrowers undertake while investing in the company by foregoing investment in risk free government security.

revenues generated by the firm should be greater than the cost of funds employed by it. in other words the expected future cash flows generated by the firm in the course of its business, discounted at its cost of capital, should yield a positive NPV.

CONCEPTUAL FRAMEWORK
THEOROTICAL BACKGROUND OF EVA

BENNET STEWART shows us a method measuring the value of a company in any given year with a concept he calls ECONOMIC VALUE ADDED or EVA. EVA is basically the diffrence between the operating profit and the cost of capital employed. Any year that a company is in business and generates more operating profit than its capital charge, it is creating economic value. By discounting this spread, taking the present values of all future EVA's at the rate of the cost of capital employed, you get the cumulative present value of all future EVA's. Add this to the current capital and you derive the value of a company.
EVA incorporates a thinking about financial structures that also facilitates a better understanding of the mechanics in a balance sheet and P&L . Pure cash flow analysis will miss crucial opportunities by disregarding companies with negative cash flows. most impottantly, EVA gives you a very handy set of tools to understand and question management's action and value its progress year by year.

EVA is a managerial accounting concept that considers how well a business is performing by, among other things, deducting the firm's capital costs from its profits. what is left is known as eva, as opposed to the familier accounting profit that on corporate income statements and some believe this better suggests how well the company is using capital to build economic value.
Managers, in turn, use this information to deploy corporate resource in ways that enhance economic value.

Economic value based strategic planning techniques, which tie business level competitive strategies to the corporation's stock price, have achieved increasing recognition among financial managers. these models evaluate business strategies in terms of their ability to create value for the shayerholders and attempt to ensure that business level competitive strategies are related to the fundamental objective of maximizing the return to the company's shayerholders.

Interest in economic value creation is interwined with a number of other popular management practices and trends related to competitive strategy and information technology. Specifically, improved access to detailed operational data has corporate executives to focus on very precise value related targets, be they cost, be they cost reduction, new investment or other resource allocation decisions. A supporting trend has been the popularity of so called activity- based costing and activity based management, which juxtapose the value of each step in a manufacturing or service process with its costs. this information, coupled with overall strategic objectives, allows companies to focus on activities that create the most valueand conversely. to avoid devoting inordinate amounts of resources to activities that produce little value. such efforts are by no means synonymous with economic profit, but like it, they are concerned with maximizing returns on resources and can in fact lead to greater economic profit.

however there is no single definition of what constitutes economic profit or how it should be figured; for large corporations, in particular, it remains somewhat of an abstraction that cannot be computed as easily as, say net income.Perhaps the best known technique is economic value added, which was devloped by the consulting firm Stern Stewart & co. indeed, Stern Stewart has claimed a trademark on the acronym, promting other agencies to devise new names like "economic value management" for essentially the same methods. According to the EVA approach, managers should be evaluated by the economic returns they generate for shayerholders.Strategies that are expected to create the greatest sustainable competitive advantage are those that also genrate the largest value for the firm's shayerholders. Only investments providing positive economic return should be undertaken. positive economic returns are generated when the returns on an investment are greater than the market cost of capital. the market cost of capital reflects what the business could earn on an investment of similar risk.