Economic Value Added - Essay Example

The net present value of the project was -$393872. The inflows of the project were the revenues of $660,000. The outflows of the project were the taxes of $264,000 and the yearly cost of $100,000. The new cash flows were $296,000. The project was discounted at an interest rate of 8%. The cumulative net cash flows of the company were $2906128. The initial cost of $3.3 million was subtracted to arrive at the NPV of -$393872. The project should be rejected because the NPV was negative. Subjective factors affect the decision making of projects.

In this example, a subjective factor that could affect the decision is whether or not the sales forecast is reliable. Another subjective factor that should be considered in the selection of the contractor to build the lift. The company should choose a contractor with a reputation for doing quality work to ensure that the 20-year useful life is reliable. Economic value added or EVA is a measure of a company’s financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profits (Answers, 2011).

The metric is often also referred to as economic profit. The formula to calculate economic value added is net operating profits after taxes (NOPAT) minus capital multiplied cost of capital [NOPAT – (capital * cost of capital)]. EVA measures the surplus value created on an investment. Four advantages associated with the use of EVA are: The balanced scorecard consists of an integrated set of performance measures that are derived from the company’s strategy and support the company’s strategy throughout the organization (Garrison & Noreen, 2003).