Premium Essay

Economic Value Added

In: Business and Management

Submitted By afrempo4
Words 1749
Pages 7
Introduction
It is important for every business to measure and evaluate how well it performs in relation to its objectives and goals. The primary goal of every business is to generate value for the business. The desire to achieve these goals directs scare resources to products that are deemed profitable; however, value is generated not only from profitable products but rather through the effective use and management of resources. Value can be viewed as maximizing wealth of shareholders, and or improving the quality of life. The desire for businesses to generate value has resulted in using and developing different performance measurement, sometimes centered on the wrong financial measurement, and strategy. Businesses today only look cash strategies, and sometimes operational goals, and ignore the main reason for existence, which results in rewarding employees and even management for the wrong achievement instead of procedures and strategies that actually added value to the business. If the main goal is to generate value then, it follows that measuring performance must be geared toward this, and not solely on profitability.
This paper will discuss the importance Economic Value Added (EVA) in measuring performance of a business. It will also look at how it is calculated and possible disadvantages
Definition and History
It is normally to see many businesses use the profit base measurement as their primary measure of evaluating the performance of its organization, however, this approach ignores the cost of equity capital, and only concentrate on the cost of debt used to finance operations. Secondly, profits to do not wholly reflect the wealth that a business has created, and lastly profits can actually be manipulated by accountants and managements. These flaws gives the need for a better performance evaluation tool, that takes into account both debts and equity,

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