Assuming that your existing capital base has not "cost of use" may lead to poor financial decisions. EVA© is a registered trademark of Stern Stewart & Co. |
Business decisions before EVA went like this... Management understood that their debt had a cost. If the loan rate was 8%, then they understood that the cost for the use of that money was 8%. However, management treated their own equity, or retained earnings, as if it had a zero cost. They had paid taxes on it already and it was just sitting around waiting to be used. These assumptions affect the hurdle rates that financial managers use to determine which projects or opportunities are worthy to be funded. |
No math presented on this screen. |