EVA-Economic Value Added

An improvemnet of merely using accounting numbers is the use of ECONOMIC VALUE ADDED (EVA) (EVA is trademarked to Stern Stewart whose firm has probably the best discussion of EVA). 

EVA is an attempt to bring the assumptions of the accounting system into line with the economic realities.  For example, there is no expecnse in an accounting system for a cost of equity while there is definitely an economic cost (the cost of equity is not zero).  

What EVA attmepts to do is to take operating income and subtract the cost of capital (both interest and the cost of equity).  

Stern Stewart has a great explanation on it.

EVA is not really a replacement of an Income Statement, but rather is used in addition to it (indeed it builds upon the income statement).   It is often used in pay plans and therefore has also been used as a means of evaluating capital budgets, but it really should not be used for that.  

EVA, and to a lesser degree MVA (market value added), are pretty hot topics.  We will be spending some time on it in class, but you should also do some outside reading on it.  It is widely used in the real world and you are responsible for it on the test. :-)

Links:
Narcyz Roztocki has a great site that includes many links on EVA--check it out!
Huh?  Hotels-Online?  Yep, they explain how to use EVA and why!
Evanomics
Peter Keen has a look at EVA as well
The CSX case from Ohio State lists a great example of how EVA might actually help. 

More to follow?