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Economic Value Addition
Human Resources » Knowledge Management

Chrm Message From: priyanka Total Posts: 86 Join Date: 26/09/2006
Rank: Manager Post Date: 05/05/2007 07:08:24 Points: 430 Location: United States

EVA or Economic Value Added is all about addition of financial value to the organisation through whatever activity you do. Fundamentally, EVA is defined as positive if the company's net contribution is greater than the prevailing cost of capital. For eg suppose a company engages 100 crs in eny economic activity, then the cost of capital at say 12% rate works out to be 12 crs. If the company generates greater than 12 crs as net contribution then it is supposed to have +ve EVA else it's EVA is -ve. In other words the company is better off lending it's capital at 12% to other rather than do business and generate -ve EVA.

This concept of EVA can be applied to a dept, a division, a project or an individual employee. In any new initiative, estimate the cost of capital employed, and try to quantify the results in money terms. It the results cover the cost of capital employed then that
activity is +EVA else it is -ve.

Warm Regards


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