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Unit 4: Concept of Economic Value Added
Mahesh Kumar Sarva, Lovely Professional University

Unit 4: Concept of Economic Value Added Notes

CONTENTS
Objectives
Introduction
4.1 Economic Value Added (EVA)
4.2 Advantages of EVA

4.3 Evaluation of EVA
4.4 Limitations of EVA Analysis
4.5 Summary
4.6 Keywords
4.7 Review Questions
4.8 Further Readings

Objectives

After studying this unit, you will be able to:

 Recognize the meaning and scope of financial management
 Describe the goals and objectives of financial management
 Explain the different Finance functions
 Discuss various significant aspects related to financial management
Introduction

Management Information System can be developed as an act of interrelated components that
collect (or retrieve), process, store and distribute information to support decision-making,
co-ordinate and control in an organisation. Information means data have been shaped into a
form that is meaningful and useful to human being. Data are stream of raw facts reporting
events occurring in organisation or physical environment before they have been organized and
rearranged into a form that people can understand and use. Performance measures are a central
component of management information and reporting system. It deals with performance
measures for different levels of an organisation and for managers at these levels – both financial
and non-financial performance measures.
Economic Value Added was developed to promote value-maximizing behaviour in corporate
managers. It is a single, value-based measure that was intended to evaluate business strategies,
capital projects and to maximize long-term shareholders wealth.

4.1 Economic Value Added (EVA)

An alternative measure of financial performance in an investment centre is segment Residual
Income or Economic Value Added.
Economic Value Added (EVA) is the amount in rupees that remains after deducting an “implied”
interest charge from operating income. The implied interest charge reflects an opportunity cost, and
is charged on the amount of assets in each investment centre. The rate of interest charge is equal to the
minimum rate on investment specified by top management as part of the corporate strategic plan.

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