Analysis Essay Example | Topics and Well Written Essays - 250 words - 6

Analysis - Essay Example This article considered an application of ABC method in practice. As the case study related, Teva Ltd. benefitted from considering this method over more traditional ones because it helped her to reduce the unused capacity and finally to improve its production. EVA (economic value added) can be defined as an indicator of financial performance, and is computed by the difference between operating profits and a capital charge. It can be sustained that EVA is a true measure of economic profit, which takes into account all costs, implying also the cost of capital. Another measure is MVA (market value added), and it is an indicator of the wealth of the company. It is computed as the difference between market value of common stock, preferred stock, debt and the total capital. Basically, it is the difference of the amount investors can take out and the amount invested by them. Considering EVA in valuation has also drawbacks. One of them is the fact that EVA does not consider the growth opportunities of the company. To solve this issue, management should take into account the MVA method. The article discussed the use of EVA and MVA in valuation of a company’s investments. Although, probably in practice an NPV and IRR methods are easier to implement, EVA could be a more appropriate indicator to measure performance and to make the appropriate decisions when running a company. To recap, EVA is the difference between net operating profit and capital charges, whilst MVA is the difference between market value and invested capital. EVA is preferred to MVA mainly because it is more amenable to periodic performance management. Using EVA in valuation brings benefits such as resolving budgeting issues, easiness of the making decision process, and accountability of management for all economic outlays. Basically, EVA solves some of the conflict of interest between management and shareholders by encouraging managers