Enterprise Value Added (Eva)
Economic Value Added (EVA) q q q
The Economic Value Added (EVA) is a measure of surplus value created on an investment. Define the return on capital (ROC) to be the ìtrueî cash flow return on capital earned on an investment. Define the cost of capital as the weighted average of the costs of the different financing instruments used to finance the investment.
EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)
Things to Note about EVA q q q
EVA is a measure of dollar surplus value, not the percentage difference in returns. It is closest in both theory and construct to the net present value of a project in capital budgeting, as opposed to the IRR. The value of a firm, in DCF terms, can be written in terms of the EVA of projects in place and the present value of the EVA of future projects.
DCF Value and NPV Value of Firm = Value of Assets in Place + Value of Future Growth = ( Investment in Existing Assets + NPVAssets in Place) + NPV of all future projects
= ( I + NPVAssets in Place) + where there are expected to be N projects yielding surplus value (or excess returns) in the future and I is the capital invested in assets in place (which might or might not be equal to the book value of these assets). The Basics of NPV
NPVj = :
Life of the project is n years
Initial Investment =
: Alternative Investment
NPVj =
= NPV to EVA (Continued) q Define ROC = EBIT (1-t) / Initial Investment: The earnings before interest and taxes are assumed to measure true earnings on the project and should not be contaminated by capital charges (such as leases) or expenditures whose benefits accrue to future projects (such as R & D). Assume that return of capital. : The present value of depreciation covers the present value of capital invested, i.e, it is a
q
DCF Valuation, NPV and EVA
Value of Firm = ( I + NPVAssets in Place) +
=
=
= In other words,
Firm Value = Capital Invested in Assets in Place + PV of EVA
The Economic Value Added (EVA) is a measure of surplus value created on an investment. Define the return on capital (ROC) to be the ìtrueî cash flow return on capital earned on an investment. Define the cost of capital as the weighted average of the costs of the different financing instruments used to finance the investment.
EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)
Things to Note about EVA q q q
EVA is a measure of dollar surplus value, not the percentage difference in returns. It is closest in both theory and construct to the net present value of a project in capital budgeting, as opposed to the IRR. The value of a firm, in DCF terms, can be written in terms of the EVA of projects in place and the present value of the EVA of future projects.
DCF Value and NPV Value of Firm = Value of Assets in Place + Value of Future Growth = ( Investment in Existing Assets + NPVAssets in Place) + NPV of all future projects
= ( I + NPVAssets in Place) + where there are expected to be N projects yielding surplus value (or excess returns) in the future and I is the capital invested in assets in place (which might or might not be equal to the book value of these assets). The Basics of NPV
NPVj = :
Life of the project is n years
Initial Investment =
: Alternative Investment
NPVj =
= NPV to EVA (Continued) q Define ROC = EBIT (1-t) / Initial Investment: The earnings before interest and taxes are assumed to measure true earnings on the project and should not be contaminated by capital charges (such as leases) or expenditures whose benefits accrue to future projects (such as R & D). Assume that return of capital. : The present value of depreciation covers the present value of capital invested, i.e, it is a
q
DCF Valuation, NPV and EVA
Value of Firm = ( I + NPVAssets in Place) +
=
=
= In other words,
Firm Value = Capital Invested in Assets in Place + PV of EVA