JOSH:$$Well$,$ because Extensive$$s book value$$with changes in the market price of the firm$$s shares, the firm$$s book value$$reflect management$$s efforts to maximize the shareholder wealth and therefore $$be used to evaluate management$$s performance.

Now, what about $$Economic Value Added$?$

MIA:$$During the $1990$s$,$ the consulting firm Stern, Stewart & Company developed the concept of Economic Value Added, or EVA, to better assess management$$s performance in maximizing their shareholders$$ wealth.

Extensive$$s EVA equals the additional profit created in excess of the after$-$tax operating income necessary to finance its total after$-$tax cost of capital, which is expressed in annual dollars. It is computed by subtracting Extensive$$s$$from its$.$

In turn, Extensive$$s annual cost of capital is calculated by multiplying its total$$operating capital, which includes its net fixed assets and net operating working capital, by the after$-$tax percentage cost of capital.

OK$,$ given that description, here$$s a question for you: Compared to the book value, what is the advantage of using the EVA to evaluate the performance of Extensive$$s management?

JOSH:$$Give me a second to think.$..$OK$,$ it$$s better to evaluate the performance of Extensive$$s management by using the company$$s EVA rather than the book value of its shareholders$$ equity because the better the managerial decisions being made, the$$the after$-$tax net operating income earned, the$$the difference between this net operating income and the cost of capital needed to generate that income, and the$$the EVA, or true economic profit, earned by the company.