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Explanations Of Eva, Mva And Npv

932 words - 4 pages

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 can simply be defined as an
estimate of the amount by which earnings exceed or fall short of the
required lowest rate of return that shareholders could receive by
investing in the company. The main aim of any company should be to
maximise the wealth of their shareholders, and as put forward by
Stern-Stewart, EVA should be an aid to managers of company’s striving
for this common target. The value of a company can also be easily
judged with the aid of EVA by analysing the extent to which
shareholders expect earnings to exceed or fall short of the total cost
of capital. EVA takes into account the full cost of operating costs
and capital costs including the full cost of equity.

Market Value Added (MVA) is known as the difference between the market
valuations of a company and the sum of the adjusted book value of debt
and equity invested in a company. When broken up MVA can simply be
defined as ‘the difference between the total market value of the
company and the economic capital’ (Firer, 1995: 57, Reilly and Brown,
2003:591). The economic capital of the company is the amount that has
been invested in the company which is simply the fixed assets plus the
networking capital. MVA is the best external measure of a company’s
performance. MVA is determined by EVA. ‘A company’s EVA is the fuel
that fires up its MVA’ (Stewart 1991: 153). The major link that can be
identified between MVA, which is known as the cumulative measure, and
EVA, which is known as an incremental measure, is that MVA is equal to
the present value of all future EVA to be produced by the company. In
order to see whether a value has been added, or destroyed, to the
company over a period of time the difference in MVA from one date to a
the next should be calculated. 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...

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