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Economic Value Added

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Presentation on theme: "Economic Value Added"— Presentation transcript:

1 Economic Value Added

2 Cost accounting Integrating EVA and Process Based Costing 1 Recently, Mocciaro Li Destri, Picone & Minà (2012). proposed a performance and cost measurement system that integrates the Economic Value Added criteria with Process Based Costing (PBC). The EVA-PBC methodology allows us to implement the EVA management logic not only at the firm level, but also at lower levels of the organization. EVA-PBC methodology plays an interesting role in bringing strategy back into financial performance measures.

3 Sustainable development - Business case 1 This eco-efficiency is usually calculated as the economic value added by a firm in relation to its aggregated ecological impact

4 Business value 1 Business value expands concept of value of the firm beyond economic value (also known as economic profit, economic value added, and shareholder value) to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value

5 Total cost of ownership - Use of concept 1 TCO, when incorporated in any financial benefit analysis, provides a cost basis for determining the total economic value of an investment. Examples include: return on investment, internal rate of return, economic value added, return on information technology, and rapid economic justification.

6 Outline of finance - Equity valuation 1 * Economic value added

7 Outline of finance - Discounted cash flow valuation 1 ** Market value added / Economic value added

8 Business performance management - Methodologies 1 Various methodologies for implementing business performance management exist. The discipline gives companies a top-down framework by which to align planning and execution, strategy and tactics, and business- unit and enterprise objectives. Reactions may include the Six Sigma strategy, balanced scorecard, activity-based costing (ABC), Total Quality Management, Economic value added|economic value-add, integrated strategic measurement and Theory of Constraints.

9 Organizational performance 1 performance (profits, return on assets, return on investment, etc.); (b) product market performance (sales, market share, etc.); and (c) shareholder return (total shareholder return, economic value added, etc.).Richard et al. (2009): Measuring Organizational Performance: Towards Methodological Best Practice. Journal of Management. The term Organizational effectiveness is broader.

10 Whole-life cost - IT industry usage 1 When incorporated in any financial benefit analysis (e.g., Return on investment|ROI, Internal rate of return|IRR, Economic value added|EVA, Return on information technology|ROIT, Rapid economic justification|RJE) TCO provides a cost basis for determining the economic value of that investment.

11 Corporate finance - Investment and project valuation 1 Alternatives (complements) to NPV include Residual Income Valuation, Market value added|MVA / Economic value added|EVA (Joel Stern, Stern Stewart Co) and Adjusted present value|APV (Stewart Myers)

12 Corporate finance - Working capital management 1 In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA)

13 Profit (accounting) - Definition 1 There are analysts who see the benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart Co. which has trade-marked their adjusted economic profit as 'Economic Value Added' (EVA).

14 Activity-based costing - Prevalence 1 Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics, such as Kaplan's balanced scorecard and economic value added

15 Economic value added 1 In corporate finance, 'Economic Value Added' ('EVA'), is an estimate of a firm's economic profit – being the value created in excess of the Required rate of return|required return of the types of companies|company's investors (being shareholders and debt holders)

16 Economic value added - Relationship to market value added 1 The firm's market value added, or MVA, is the discounted sum (present value) of all future expected economic value added:

17 Working capital management 1 In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA)

18 Accounting reform - Business 1 Limited reforms within professional management circles have led in the past to activity-based costing, economic value added, and risk measures.

19 Working capital - Decision criteria 1 See economic value added (EVA).

20 List of business theorists - S 1 * Eugen Schmalenbach – economic value added (1920s–?)

21 List of business theorists - S 1 * Joel Stern – economic value added (1980s)

22 Market value added - Basic formula 1 MVA is the present value of a series of Economic value added|EVA values. MVA is economically equivalent to the traditional Net present value|NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting.

23 Residual income valuation 1 The approach is largely analogous to the economic value added|EVA / Market value added|MVA based approach, with similar logic and advantages

24 Residual income valuation - Comparison with other valuation methods 1 Although EVA is similar to residual income, there will be technical differences between EVA and RI, specifically Stern Stewart Co, originators of EVA, recommend a fairly large number of adjustments to NOPAT before the methodology may be applied.[][http: // forums/cfa-level-ii-forum/91309816] See Economic_value_added#Comparison_with_o ther_approaches|Economic value added# Comparison with other approaches.

25 Interbrand - Methodology 1 Interbrand has refined its brand valuation into a five- step Economic Value Added methodology

26 EVM 1 * Economic value management; see economic value added

27 Risk adjusted return on capital - Basic formula 1 For risk management purposes, the main goal of allocating capital to individual business units is to determine the bank's optimal capital structure—that is economic capital allocation is closely correlated with individual business risk. As a performance evaluation tool, it allows banks to assign capital to business units based on the economic value added of each unit.

28 Added value - Other consultancy measures 1 *Economic Value Added

29 NOPAT 1 NOPAT is frequently used in calculations of Economic value added and Free cash flow.

30 NOPLAT 1 NOPLAT minus the monetary cost of all capital (both equity and debt) equals economic profit, which is quite similar to the trademarked Economic value added|EVA model.

31 For More Information, Visit: m/the-economic-value-added- toolkit.html m/the-economic-value-added- toolkit.html The Art of Service

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