WHAT IS EVA(Economic value added) & RI(Residual income) ? AND EXAMPLE?

Question

WHAT IS EVA(Economic value added) & RI(Residual income) ? AND NEED SOME EXAMPLE FOR UNDERSTANDING

Answer 1

EVA is when u do something to a product that makes it more valuable like adding pin stripping to a vehicle.

RI is when u do some work, and continue to get paid after the work is done, like selling life insurance or investments.

Answer 2

Eva Vs Roi

Answer 3

Economic Value Added - EVA
A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".)

The formula for calculating EVA is as follows:

= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)

EVA = After-tax Income - (Cost of Capital x Capital Invested).

RI is the amount of income that an individual has after all personal debts, including the mortgage, have been paid. This calculation is usually made on a monthly basis, after the monthly bills and debts are paid. Also, when a mortgage has been paid off in its entirety, the income that individual had been putting toward the mortgage becomes residual income.

The major difference between RI and EVA is that RI uses the market value or book value of assets for the capital invested in the division or firm while EVA uses the market value of total equity and interest-bearing debt.

Residual income, unlike ROI, is an absolute amount of income rather than a rate of return. When RI is used to evaluate divisional performance, the objective is to maximize the total amount of residual income, not to maximize the overall ROI percentage figure. For example, assume that operating assets are $100,000, net operating income is $18,000, and the minimum return on assets is 13%. Residual income is $18,000 - (13% x $100,000) = $18,000 - $13,000 = $5000. RI is sometimes preferred over ROI as a performance measure because it encourages managers to accept investment opportunities that have rates of return greater than the charge for invested capital. Managers being evaluated using ROI may be reluctant to accept new investments that lower their current ROI, although the investments would be desirable for the entire company. Advantages of using residual income in evaluating divisional performance include: (1) it takes into account the opportunity cost of tying up assets in the division; (2) the minimum rate of return can vary depending on the riskiness of the division; (3) different assets can be required to earn different returns depending on their risk: (4) the same asset may be required to earn the same return regardless of the division it is in; and (5) the effect of maximizing dollars rather than a percentage leads to Goal Congruence