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4. EVA Analysis Business Valuation Method
The EVA presents the analysis of the Economic Value Added, an advanced evaluation method that measures the performance and the profitability of the business, taking in account the cost of capital that the business employs. This method, invented by Stern Stewart & Co. , is used today by more and more companies as a framework for their financial management and their incentive compensation system for the managers and the employees.
The EVA is calculated by the following formula:
EVA =NP-TC *WACC
Where:
NP = Net Operating Profit after Tax
TC = Total Capital Employed = Total Equity and Liabilities of the Company
WACC = Weighted Average Cost of Capital
The Weighted Average Cost of Capital (WACC) is calculated as follows:
WACC=(E*CE+SL*CS+LL*CL)/TC
Where:
E = Owners Equity
CE = Average cost of Owners Equity
SL = Short Term Liabilities
CS = Average cost of Short Term Liabilities
LL = Long Term Liabilities
CL = Average cost of Long Term Liabilities
The net present value of EVA is calculated according to the Discount Rate as follows:
NPVEVA=Σ(EVAi/(1+ r)^i)+EVAn/r
Where:
EVAi = EVA calculated for year i
r = Discount Rate
n = the last year of the plan period
Operating Steps
Enter the average cost of capital for the equity, the long term libilities and the short term liabilities, then enter the discount rate. The values of the EVA will be calculated and presented. Please note that when you enter data into the average cost cells, the values are copied to the following years IF the cells for these years are empty.
Note: EVA® is a registered trademark of Stern Stewart & Co.
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