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Economic value added (EVA) is a measure of a company's financial performance based on the residual

wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash
basis.

Economic value added. In corporate finance, economic value added (EVA) is an estimate of a
firm's economic profit, or the value created in excess of the required return of the company's
shareholders. EVA is the net profit less the equity cost of the firm's capital.

Economic value added (EVA) is an internal management performance measure that compares
net operating profit to total cost of capital.

Economic value added (EVA) is also referred to as economic profit.

The formula for EVA is:

EVA = Net Operating Profit After Tax - (Capital Invested x WACC)

As shown in the formula, there are three components necessary to solve EVA: net operating
profit after tax (NOPAT), invested capital, and the weighted average cost of capital
(WACC) operating profit after taxes (NOPAT) can be calculated, but can usually be easily found
on the corporation's income statement.

The next component, capital invested, is the amount of money used to fund a particular project.
We will also need to calculate the weighted-average cost of capital(WACC) if the information is
not provided.

The idea behind multiplying WACC and capital investment is to assess a charge for using the
invested capital. This charge is the amount that investors as a group need to make their
investment worthwhile.

Let's take a look at an example.


Assume that Company XYZ has the following components to use in the EVA formula:

NOPAT = $3,380,000
Capital Investment = $1,300,000
WACC = .056 or 5.60%

EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200

The positive number tells us that Company XYZ more than covered its cost of capital. A negative
number indicates that the project did not make enough profit to cover the cost of doing business.

Economic Value Added (EVA) is important because it is used as an indicator of how profitable
company projects are and it therefore serves as a reflection of management performance.

The idea behind EVA is that businesses are only truly profitable when they create wealth for their
shareholders, and the measure of this goes beyond calculating net income. Economic value
added asserts that businesses should create returns at a rate above their cost of capital

The economic value calculation has many advantages. It succinctly summarizes how much and
from where a company created wealth. It includes the balance sheet in the calculation and
encourages managers to think about assets as well as expenses in their decisions.

However, the seemingly infinite cash adjustments associated with calculating economic value can
be time-consuming. And accrual distortions can still affect the measure, particularly when it
comes to depreciation and amortization differences. Also, economic value added only applies to
the period measured; it is not predictive of future performance, especially for companies in the
midst of reorganization and/or about to make large capital investments.

The EVA calculation depends heavily on invested capital, and it is therefore most applicable to
asset-intensive companies that are generally stable. Thus, EVA is more useful for auto
manufacturers, for example, than software companies or service companies with a lot of
intangible assets.

Economic value added is the incremental difference in the rate of return over a
company's cost of capital . In essence, it is the value generated from funds invested
in a business. If the economic value added measurement turns out to be negative,
this means a business is destroying value on the funds invested in it. It is essential to
review all of the components of this measurement to see which areas of a business
can be adjusted to create a higher level of economic value added. If the total
economic value added remains negative, the business should be shut down.

To calculate economic value added, determine the difference between the actual rate
of return on assets and the cost of capital, and multiply this difference by the net
investment in the business. Additional details regarding the calculation are:

 Eliminate any unusual income items from net income that do not relate to
ongoing operational results.
 The net investment in the business should be the net book value of all fixed
assets, assuming that straight-line depreciation is used.

 The expenses for training and R&D should be considered part of the investment
in the business.

 The fair value of leased assets should be included in the investment figure.

 If the calculation is being derived for individual business units, the allocation of
costs to each business unit is likely to involve extensive arguing, since the outcome
will affect the calculation for each business unit.

The formula for economic value added is:

(Net investment) x (Actual return on investment – Percentage cost of capital)

This calculation yields more reliable results when the targeted organization has a
large asset base. Its results are less certain when a business has a large proportion
of intangible assets .

5 Trends in Brand Management


When it comes to trends in brand management, there are always emerging activities that reflect changes in
social, cultural, economic and technological environments. While they may create risks for some, they also
provide companies with opportunities to break bad habits, implement new business models and introduce
innovative technologies.
Consumer Interaction
One of the most notable paradigm shifts is the important role that consumers play in the branding process.
Companies cannot continue to assume that consumers will passively play along with marketing activities. In
most cases now, consumers want to play an active role with brands by directly impacting their message,
position and method of marketing. While a designated amount of consumers will always want to play a passive
role, they are becoming more open to providing feedback through online platforms and social media sites.
There are still a number of challenges in consumer engagement and brand management.
New Brand Strategies
Companies are now striving to simplify and consolidate their brand infrastructure by using fewer brands in order
to make the existing ones as strong as possible. In order to accomplish this, companies are finding fresh ways
to create more emotionally compelling brand positions. Companies are also developing and executing different
types of marketing activities and programs to build and maintain their brand equity. The most important part of
the brand building process is at the beginning when a firm foundation of brand awareness is established with
consumers. Consumers must know who the brand is, such as its name and image, what need it satisfies, such
as functionality or pleasure, and why it’s and uniquely worth buying.
The Impact of Technology
Technology and the Internet continue to revolutionize brand management. Consumers now have access to
more information on brands through online blogs, reviews, websites and social media platforms. Regardless of
whether companies are prepared for it or like it, technology has dramatically increased the level of information
transparency and availability. Today, brand success is dictated by companies who can leverage technology in
the smartest ways possible to understand what is happening with consumers, the competition and industry as a
whole. The good news is that online marketing activities allow companies to fundamentally change how they
build and manage their brands in response to consumer feedback.
Unchanging Elements
There are certain vital elements of brand management that aren’t changing, just transforming into unique
trends. Brand management is successful when everyone in the company has a clear understanding of what the
brand represents and how their actions either help or hurt the brand. This means that companies must monitor
what their employees post on social media platforms regarding the brand, product, service and company. All
employees should be encouraged to report their observations regarding the brand and the company to
managers or marketing peers. Finally, companies must synchronize bottom-up and top-down brand
management activities.
The Growth of Small Businesses
Over 28 million small businesses account for over half of all sales in the U.S. The number of small businesses
is growing and so is their branding approach in comparison to big companies. They will still employ traditional
marketing strategies, such as segmentation and positioning, and historical marketing tactics, such as growth
and integration. However, the Internet and technology levels the marketing playing field and increases the
competitiveness of small businesses. In order to be successful, smaller businesses must focus on one or two
strong brands and their one or two key associations. They must employ an integrated set of brand logos,
symbols, signage, slogans and packaging.
Other notable trends in brand management include mobile technology, which is revolutionizing consumer
behaviors, and the growing significance of corporate sustainability and social responsibility.

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