A Comparison of EVA and NPV

Finance executives are required not only to crunch numbers and generate forecast but to think ‘critically, not Just seeing the numbers but understanding their implications.

This is what Melon (1994) refers to as conducting a financial assessment’ which often involves; the comparisons of the firm’s profitability in elation to its competitor, a determination of the magnitude of its investment, estimating the likelihood of premiums, and projecting the impact stockholders may sustain. (Melon, 1994, p. 454) While all sectors of an organization contribute to its success, it is the finance department that often drives major decisions.

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Do we invest, can we afford to invest, and if so, how much? This is a basic example of the type of questions asked frequently of a finance executive. Through analysis of the ‘numbers’ generated by the accounting department, or by conducting a financial assessment of the organization, enhance executives are often able to guide the decision making process, and in ideal situations, generate revenues and growth for their company.

This of course, is not to imply that the finance department has the final say, according to Melon (1994), “decision making at the organizational level involves integration, considering ‘all’ the issues raised by executives in various roles, considering ‘all’ the lines of reasoning that might be generated, and deciding how best to combine the collective knowledge and beliefs” (Melon, 1994, p. 439). This informative paper will review academic literature to draw a comparison between woo financial theories’, EVA (Economic Value Added) and NAP (Net Present Value).

Arranged in four sections, this paper will: (1) define EVA and NAP highlighting their similarities and differences; (2) explain why companies choose to adopt EVA; (3) discuss some of the issues faced when implementing EVA; (4) and finally chronicling ‘McKee Foods Corporation’s’ experience while implementing EVA. Similarities and Differences between EVA (Economic Value Added), and NAP (Net Present Value).

Jesse
from Nandarnold

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