IDEAS home Printed from https://ideas.repec.org/p/col/000463/003752.html
   My bibliography  Save this paper

Value Creation and its Measurement: A Critical Look at EVA

Author

Listed:
  • Ignacio Velez-Pareja

Abstract

SUBJECT AREAS: Corporate Finance, Valuation, Capital Budgeting, Investment Policy, Economic Value Added, EVA, Market Value Added, MVA, Net Present Value, NPV, cash flows, free cash flows real free cash flows This technical note studies Economic Value Added, EVA. First, a conceptual framework regarding Net Present Value, NPV, is presented. Second, the note presents an approach for calculating the free cash flow of a project starting from the periodic net cash flows. Third, a procedure for calculating the real free cash flow is developed. Fourth, the EVA is presented and contrasted to NPV. EVA starts from accounting figures (profit) and NPV starts from net cash flows. The coincidence between MVA and NPV is examined. Four examples are presented which reveal some inconsistencies between the two measurement. The four examples show circumstances where EVA underestimates the value generated by a project or firm as compared with the NPV. An approach for calculating the real EVA is presented. The note offers reflections upon figures that should be employed in order to calculate the cost of the invested capital or equity to be included in EVA calculation. Finally, different approaches to calculate EVA and MVA are compared with NPV results.

Suggested Citation

  • Ignacio Velez-Pareja, 1999. "Value Creation and its Measurement: A Critical Look at EVA," Proyecciones Financieras y Valoración 3752, Master Consultores.
    • Handle: RePEc:col:000463:003752
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=163466#PaperDownload
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    Corporate Finance; Valuation; Capital Budgeting;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000463:003752. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ignacio Velez (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.