Explanations of EVA, MVA and NPV Essay example

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Explanations of EVA, MVA and NPV and their relationship with each other. The concept of EVA is a measure of economic profit and was popularised and originally trade-marked by Stern Stewart Consulting Company in the
1980’s. Economic Value Added (EVA) can be defined as the difference between net operating profit after taxes and the monetary value of a company’s total cost of capital. Should a company’s profit exceed the overall costs of funds they create EVA. It can be so important because
EVA is the most efficient internal measure of the true economic profit of a company. Managers within any company can use this measure in order to obtain any crucial information they may need when making crucial decisions. When broken up EVA
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With MVA representing the stock markets assessment of a company it can be derived that the higher the MVA the better as this would represent greater wealth for the shareholders.

The finance decision model Net Present Value (NPV) can be defined as the difference between the present value of an investment’s future net cash flows less the initial investment. The result of NPV expresses how much value an investment will result in which is done by measuring over a period of time all cash flows, and back towards the present time. Should the result of the NPV method be positive, should there not be a better investment anywhere else, it can be concluded that an investment should be made. However, although the NPV measurement is widely used for making investment decisions, a disadvantage can be found as NPV does not account for uncertainty after the project decision is made. The relationship between MVA and NPV can be defined as, ‘MVA is a cumulative measure of corporate performance and it represents the stock market’s assessment from a particular time onwards of the NPV of all a company’s past and projected capital projects.’(Stewart 1991:153)

Summary of conditions if WACC is to be used as cut-off rate

For the WACC that has been calculated to be used as the marginal cut-off rate for investment, certain conditions must be met. The first thing is that it assumes that new projects have the same level of business risk as the

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