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Key MBA Models by Dr. Julian Birkinshaw, Ken Mark

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Economic value added

Economic value added (EVA) takes into account a firm’s total invested capital when evaluating its financial performance. The final figure is based on subtracting a capital charge – on invested capital – from the firm’s net operating profit after taxes. The final figure can be thought of as the real return investors are getting on their money.

When to use it

  • To get an accurate measure of the return a firm has generated, in a given time period, on the capital invested in the firm.
  • To uncover opportunities to improve the way a firm uses its invested capital.

Origins

The notion that a firm’s true ‘economic profit’ requires an adjustment for its cost of capital dates back at least to the 1960s. The idea waned in popularity ...

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