Strengths, weaknesses and uses of the Economic Value Added Essay

Strengths, weaknesses and uses of the Economic Value Added - Essay Example Economic Value Added (EVA) model also referred to as economic 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 company makes after the cost of financing the company’s capital is deducted. In order to obtain the economic profits, the cost of capital must be less than the return on the firm’s capital employed. This paper candidly evaluates the uses of Economic Value Added model in a business as well as its strengths and weaknesses.Uses of EVAÃ'ŽEVA 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 indicates the amount of the residual income. There are various factors th at 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.