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Dear Khalidrefrence to your question the economic value vs economic cost which forget by using the decision for investment will show the NPV for investment after deduct the value such as if we keep the amount as fixed deposit at bank at interst rate10% and the investment will give us12% as IRR so the value added from investment is2% so the decision will be based on the value and risk
Dear Khalid,
EVA can be used for Investment Appraisal. As EVA is Consistent with NPV (which is widely used for Investment Appraisal). Both Approaches are cash Based but EVA capitalises long term Value adding Expenditures.
For e.g. Advertising and Marketing Expenses
In general Marketing Expenses are expensed out on yearly basis from Profits. Although each dollar spend on marketing leads to a brand development which provides benefits in long run.
EVA consider these expenses and allows to capitalise expenses related to this type. There are many more features which allows EVA to be used for Investment Appraisal. As Maximisation of EVA will create real wealth for Shareholders.
EVA can be used as a basic point of descision making, such as if investment (although postive in NPV) is providing more increase in shareholder wealth as compare to returns which can be earned by shareholder by depsoting their funds in banks or other profit yeilding investment.if they are getting marginal increase of wealth that is more than required rate of return, then i think EVA is useful.
Economic Value Added is actual cash flow of the company which will get after capital employed.
calculted by NOPAT(net operating profit after tax) - (Capital Employed * cost of capital)
In investment appraisal we would see the positive NPV is obtainng or not after applying EVA
