A DIS­CUS­SION ON ECO­NOMIC VALUE ADDED

Economic Challenger - - PRODUCT DEVELOPMENT - *REKHA RA­HEJA ** RA­JESH BHARD­WAJ *** PRIYANKA

Added

Key­words:

IN­TRO­DUC­TION

The main ob­jec­tive of the man­age­ment is to max­i­mize the share­holder’s wealth. Share­hold­ers’ wealth is mea­sured in terms of the re­turns they re­ceive on their in­vest­ment and is also di­rectly re­lated to the mar­ket value of the com­pany’s share. The mar­ket value of share de­pends upon many fac­tors, the most im­por­tant be­ing the fi­nan­cial per­for­mance of the com­pany. *As­sis­tant Pro­fes­sor, De­part­ment of Com­merce, Government Col­lege, Murthal, (Sonepat) (Haryana) **As­sis­tant Pro­fes­sor, Govt. Col­lege, De­part­ment of Com­merce, Gha­raunda (Karnal) ***As­sis­tant Pro­fes­sor, De­part­ment of Man­age­ment, Hindu Col­lege, Sonepat 131001(Haryana)

Pur­pose: De­sign/Method­ol­ogy:

AB­STRACT

’Eco­nomic Value Added’ (EVA ) is a trade­mark of the Stern Ste­wart con­sult­ing or­ga­ni­za­tion. Stern Ste­wart & Co. is a global con­sult­ing firm that spe­cial­izes in help­ing client com­pa­nies in the mea­sure­ment and cre­ation of share­holder wealth through the ap­pli­ca­tion of tools based on mod­ern fi­nan­cial the­ory. Stern Ste­wart main­tains that the im­ple­men­ta­tion of a com­plete EVA −based fi­nan­cial man­age­ment and in­cen­tive com­pen­sa­tion sys­tem gives man­agers both bet­ter in­for­ma­tion and su­pe­rior mo­ti­va­tion to make de­ci­sions that will cre­ate the great­est share­holder wealth in any pub­licly−owned or pri­vate or­ga­ni­za­tion. EVA is a method of find­ing the real prof­itabil­ity of a project, just like other fac­tors of pro­duc­tion; cap­i­tal is also a fac­tor of pro­duc­tion. We should also ad­just the cost of cap­i­tal em­ployed to find out the real profit of a project. In In­dia, very few com­pa­nies have adopted EVA as a tool of per­for­mance mea­sure­ment, some of them be­ing In­fosys Tech­nolo­gies Ltd, NIIT Ltd, BPL Ltd, Hin­dus­tan Lever Ltd, Re­liance In­dus­tries Ltd, Bal­ram­pur Chini Mills Ltd. In­fosys Tech­nolo­gies was the first In­dian com­pany to dis­close its EVA in the an­nual report for the year 1995−96. An­other In­dian com­pany that has adopted EVA as a tool for per­for­mance mea­sure­ment is NIIT. More and more In­dian com­pa­nies should adopt EVA as a tool for per­for­mance mea­sure­ment as it is def­i­nitely bet­ter than other mea­sures com­monly adopted. Ac­count­ing profit has be­come the "stan­dard" des­ig­na­tion of profit in the busi­ness world, how­ever econ­o­mists be­lieve that eco­nomic profit is a truer report on the ac­tual eco­nomic value added (EVA) de­rived from the busi­ness ac­tiv­i­ties and should be used when mak­ing de­ci­sions about en­ter­ing, stay­ing in or ex­it­ing a mar­ket. Mar­ket Value Added (MVA) is the dif­fer­ence be­tween the cur­rent mar­ket value of a firm and the cap­i­tal contributed by in­vestors. The­o­ret­i­cally, mar­ket value at a point in time is equal to the to­tal cap­i­tal em­ployed plus or mi­nus the net present value of all fu­ture Eco­nomic Value Added. There­fore, mar­ket value is max­i­mized by max­i­miz­ing the present value of fu­ture Eco­nomic Value Added. The pur­pose of the pa­per is to de­scribe the con­cep­tual frame­work of Eco­nomic Value Added.

This study is de­scrip­tive in na­ture. Sec­ondary data col­lected from dif­fer­ent sources like books, ar­ti­cles, jour­nals, web­site etc. have been used for de­scrib­ing the con­cept of Eco­nomic Value Added.

Eco­nomic Value Added, Share­holder’s wealth, Cost of cap­i­tal, Eco­nomic Prof­its, Mar­ket Value

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