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Unit 4: Concept of Economic Value Added

4.6 Keywords Notes

Capital Employed: It is the capital investment necessary for a business to function.
Corporate Finance: It is an area of finance dealing with the financial decisions corporations
make and the tools and analysis used to make these decisions.
Economic Value Added: It is an estimate of economic profit by after making adjustments to
GAAP accounting, including deducting the opportunity cost of equity capital.
Net Asset Value: It is a term used to describe the value of an entity’s assets less the value of its
liabilities.

NOPAT: It is a company’s after-tax operating profit for all investors, including shareholders and
debt holders.

4.7 Review Questions

1. Why is performance measurement required in management control system?
2. Elucidate the advantages which a firm will obtain by using EVA approach.
3. EVA results in increasing the shareholders wealth. Do you agree? Justify.
4. Comment on the major applications of EVA.
5. Analyse the need for EVA in today’s competitive scenario.
6. Elucidate how EVA is much better & efficient approach than other traditional approaches.
7. “Successful implementation of EVA requires a substantial commitment by managers and
employees at all levels of an organisation.” Comment.
8. Critically appraise the Economic value added approach.
9. Given sales of a company- 4,500,000/-, cost of goods- 2,857,600/- & tax paid by the firm
is 50000/-. Calculate NOPAT from the given data.
10. If XYZ employs a total capital of 15,896,000 & return on capital is 15%. The cost of capital
is 12%. Calculate EVA.
Answers: Self Assessment
1. Economic Value Added (EVA) 2. surplus 3. opportunity

4. investment 5. GAAP 6. different
7. investment centre 8. budgetary 9. equity cost
10. total debt 11. earning 12. investment

EVA
13. ROI 14. ´ K 15. large, small
1
4.8 Further Readings

Books Dr Pradeep Kumar Sinha, Financial Management, New Delhi, Excel Books, 2009.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.

Chandra, P., Financial Management—Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.

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