INTRODUCTION AND SCOPE OF EVA

INTRODUCTION
EVA is a measurement tool design to strengthen companies 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 decision 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 developments have shifted the efficiency 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 individual businesses and whole market as such. the organizations have learned to maintain and sustain 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 necessary to generate positive value from a capital investment. Forecasts about how much income an asset is likely to generate.
Example- sales managers' estimates of how much revenue the purchases will create- help corporate decision 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 another performance metric among many.

SCOPE
Different industries and economic sectors are in different 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 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 shareholders are commercially utilized by the same to earn revenues greater and the cost of above funds. Cost of fund covers the risk the different 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.