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Economic Value Added

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 26

Evaluation Measurement Options

Methods which help solve over-investment and under-investment problems Residual income Balanced scorecard

Goes beyond financial measures to include multiple performance dimensions

Economic value added Makes investing in longer term projects

beneficial

2

Economic Value Added (EVA)

A variation of residual income Potentially solves both over- and under-

investment problems Compels investment in the range between

required rate of return and current ROI

3

How EVA Differs from Residual Income

Removes the incentive for management to avoid spending money on enhancements which impact the long-term business operations Treats certain costs as assets instead of the

GAAP-mandated treatment as expenses Considered accounting distortions

R&D Employee training costs Customer development costs

4

Calculating EVA Calculate NOPAT and invested capital in the

same manner as with residual income Draw accounts for potential intangibles and

amortize for all years involved Calculate the accounting distortions effect on net

income, and adjust for income taxes. Add or subtract from NOPAT depending on the effect.

Calculate the accounting distortions effect on invested capital, and add to invested capital

5

NOPAT +/- [Acctg Distortions, nt]

Invested Capital +Acctg distortions‒ WACCEVA =

6

The End