A Comparison of EVA and NPV

3878 WordsOct 9, 201316 Pages
Running head: A COMPARISON OF EVA AND NPV A Comparison of EVA and NPV (discuss the differences and similarity of EVA and NPV; why would companies choose to adopt EVA, implementation issues; chronicle the implementation experience of EVA on a real life company). 1 A COMPARISON OF EVA AND NPV 2 A Comparison of EVA and NPV (discuss the differences and similarity of EVA and NPV; why would companies choose to adopt EVA, implementation issues; chronicle the implementation experience of EVA on a real life company). Finance executives are required not only to crunch numbers and generate forecast but to think ‘critically’, not just seeing the numbers but understanding their implications. This is what Melon (1994)…show more content…
EVA a New financial performance metric Figure 1. EVA a New financial performance metric. (Weaver, 2001, p.50) Figure2. Calculation of EVA per year t Figure2. Calculation of EVA per year t. (Baran et al., 2007, p. 670) Notes: Net Operating Assets – NOA According to Baran et al. (2007), “it is desirable for EVA to be positive or at [the very] least zero; the higher the value of the indicator of EVA the higher the value created [for the company stockholders]” (Baran et al., 2007, p. 673). A COMPARISON OF EVA AND NPV 5 Defining NPV; its role, application and calculation: Dilon and Owers (1997) states that, “Net Present Value (NPV) also referred to as the additional market value is generally considered a sound measure of value created” (Dilon & Owers, 1997, p. 34). The discounted value of future cash flow (FCFi), expected of a project over its lifetime less the value of the company’s initial capital investment (lo), NPV is considered to be linked to stock prices. Dilon and Owers (1997) argues that, if the acceptance of capital project by a ‘non-regulated’ firm resulted in an increase in stock prices then, if the assumption is made, that the accepted projects were examined using NPV, positive NPV equated to the creation of market value. (Armeanu & Lache, 2009, p. 144; Dilon & Owers, 1997, p. 34) According to Armeanu and Lache (2009): The NPV criterion is based on the hypothesis of an "unsaturated money market", according to which the
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