imported>Administrator |
imported>Doug Williamson |
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| (EVA).
| | ''Business skills - planning and projects.'' |
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| The periodic addition to shareholder value resulting from the efficient management and allocation of a firm's resources.
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| EVA can be quantified at a whole-firm level as:
| | Project management is the discipline and skill of designing and implementing significant projects. |
| EVA = [Return on book capital LESS Market cost of capital] x Book capital.
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| Taking a simplified example, for an all-equity financed firm with a market capitalisation (P<sub>0</sub>) of $130m, book value of equity $100m, and annual after tax returns of $13m.
| | Especially when using a recognised project management structure such as PRINCE2, agile or waterfall methodologies. |
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| [To keep the illustration simple, we will assume no growth, in other words the whole of the annual after tax returns of $13m are paid out as dividends (D<sub>1</sub>).]
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| Return on book capital = 13/100 = 13%.
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| Market cost of capital = 13/130 = 10%
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| (Using Ke = D<sub>1</sub>/P<sub>0</sub>).
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| EVA = [13% - 10% = 3%] x $100m = $3m.
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| ''In practice a number of adjustments would be made both to the market values and to the book values used in the calculation of the EVA. So the application of EVA analysis is both more complicated, and arguably more subjective, than the simple calculation illustrated above.''
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| Turning back for now to our simple example, EVA is also closely related to Market value added (MVA). MVA is the total present value of the expected EVA in the current and future periods.
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| For example in this case it is a simple fixed perpetuity of $3m, which is evaluated using the simple fixed perpetuity formula 1/r at the market cost of capital 10%:
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| MVA = $3m/0.10 = $30m.
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| 2.
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| It is also possible to calculate and analyse EVA at the individual project level.
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| In simple terms, EVA is positive when the project Internal rate of return exceeds the (appropriately risk-adjusted) Weighted average cost of capital.
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| A simple decision rule when using EVA at the project level is to reject all negative EVA projects.
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| Positive EVA projects would be considered further.
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| The important insight from EVA analysis is that a project or division is <u>destructive</u> of shareholder value when its returns are inferior to the relevant economic cost of capital, even if it appears to be profitable when measured on an accounting basis (for example on an Earnings per share basis).
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| == See also == | | == See also == |
| * [[Book value]] | | * [[Adverse selection]] |
| * [[Cost of capital]] | | * [[Agile]] |
| * [[Earnings per share]] | | * [[Association for Project Management]] |
| * [[Excess Return]] | | * [[Business skills]] |
| * [[Market value added]] | | * [[Gantt chart]] |
| * [[Return on capital employed]] | | * [[Infrastructure and Projects Authority]] |
| * [[Shareholder value]] | | * [[Planning and projects]] |
| * [[Wealth Added Index]] | | * [[PRINCE2]] |
| | | * [[Project analysis]] |
| | * [[Project Management Institute]] (PMI) |
| | * [[Safety margin]] |
| | * [[Waterfall methodology]] |
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| | [[Category:Commercial_drive_and_organisation]] |
| | [[Category:Influencing]] |
| | [[Category:Self_management_and_accountability]] |
| | [[Category:Working_effectively_with_others]] |
| | [[Category:Knowledge_and_information_management]] |
| | [[Category:Planning_and_projects]] |
