A very good presentation on EVA. Good Read!
This presentation introduces the Economic Value Added (EVA).
Economic value added (EVA) is a measure of a company's financial performance that takes into account the cost of capital. It is calculated as follows:
EVA = Net Operating Profit After Tax (NOPAT) - [(Total Capital - Cash) * Cost of Capital]
NOPAT is a company's profit after taking into account all operating expenses, but before considering taxes and interest payments. Total capital refers to the sum of a company's equity and debt, and the cost of capital is the required rate of return that investors expect for providing capital to the company.
The purpose of EVA is to determine whether a company is creating value for its shareholders. A positive EVA indicates that a company is generating profits in excess of the cost of capital, while a negative EVA indicates that it is destroying value. Companies with high EVA are generally considered to be more financially efficient and able to generate higher returns for their shareholders.
EVA can be a useful tool for the CIO as it allows a company to make informed decisions about how to allocate its resources and evaluate the financial performance of its IT projects. For example,
- Setting IT budget: A company can use EVA to determine how much it should invest in IT. If a proposed IT project is expected to generate a positive EVA, then it may be worth investing in. On the other hand, if the project is expected to have a negative EVA, then it may not be a good use of resources.
- Prioritizing projects: A company can use EVA to prioritize its IT projects. Projects with the highest expected EVA should be given the highest priority, as they are likely to create the most value for the company.
- Evaluating performance: A company can use EVA to evaluate the performance of its IT projects. If a project has a lower-than-expected EVA, it may indicate that the project is not performing as well as expected, and the company may need to re-evaluate its strategy.
- Making decisions about outsourcing: A company can use EVA to compare the costs and benefits of outsourcing IT work versus doing it in-house. If outsourcing is expected to have a higher EVA, it may be a more financially efficient option.
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