Strengths, weaknesses and uses of the Economic Value Added Essay

Strengths, weaknesses and uses of the Economic Value Added - Essay ExampleEconomic Value Added (EVA) model also referred to as stinting profit refers to the value created above the shareholders investment. Basically, shareholders and other investors are more interested in EVA since it depicts the actual returns that a club makes after the cost of financing the companys majuscule is deducted. In order to obtain the economic profits, the cost of capital must be less than the return on the firms capital employed. This paper candidly evaluates the uses of Economic Value Added model in a line of reasoning as well as its strengths and weaknesses.Uses of EVAEVA is obtained by subtracting the cost of capital from Net Operating Profit After Tax (NOPAT).In this regard, Al Ehrbar (2008) depicts that it is a useful tool for measuring the extent to which value has been lost or added on the business performance. After accounting for the various aspects covered by the balance sheet, EVA indicat es the amount of the residual income. There are various factors that cause an increase of EVA. First, if capital employed does not increase and the NOPAT increases. Secondly, EVA increases if the additional capital invested generates more returns than the cost of capital. EVA can also increase if the capital that was earlier invested in a business is divested if it fails to cover the cost of capital used by a business.