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In addition to NPV and IRR, Economic Value Added (EVA) analysis (sternstewart.com/?content=proprietary&p=eva) has emerged as a popular

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In addition to NPV and IRR, Economic Value Added (EVA®) analysis (sternstewart.com/?content=proprietary&p=eva) has emerged as a popular tool for capital budgeting and valuation. EVA was developed and is patented by Stern Stewart & Co (sternstewart.com). Explain the mechanics of EVA and show its equivalence to NPV. Provide at least two reasons why EVA and NPV may differ in implementation.

Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...
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Economic Value AddedEVA is the after tax cash flow generated by a business minus the cost of the capital it has deployed to generate that cash flow St...View the full answer


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Fundamentals of Corporate Finance

Fundamentals of Corporate Finance

ISBN: 978-0071051606

8th Canadian Edition

Authors: Stephen A. Ross, Randolph W. Westerfield

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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