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How To Understand The Economic Value Added?

2010/12/14 10:46:00 44

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The concept of economic value added stems from surplus income.

Activities that increase the rate of return on investment can sometimes reduce the value of the company.

industry

The boundary and theorists put forward an alternative method of performance evaluation, that is, using residual income to overcome the limitations of the rate of return on investment.

The residual income is the result of deducting capital cost from pre tax net income.

If the investments that exceed the cost of capital increase or the investment cost less than the capital cost is increased, the residual income will increase.

Since the residual income method helps to keep the performance of the Department consistent with the activities that maximize the value of the department or company, it has great advantages over the rate of return on investment.

In 1990s,

theory

The boundary is replaced by economic value added.

Surplus

Profit.

The concept of economic value added has expanded the residual income evaluation method from different angles. On the one hand, the economic value added is based on the capital asset pricing model, which reflects the capital cost and the risk characteristics of the sector, and can draw the risk level of a specialized, market based individual business unit.

On the other hand, the economic value added is calculated after adjusting the information that has been misinterpreted by the generally accepted accounting standards due to the needs of financial reporting.