n Management Dynamics : Journal of the Southern African Institute for Management Scientists - EVA and CFROI : a comparative analysis
|Article Title||EVA and CFROI : a comparative analysis|
|© Publisher:||Southern African Institute for Management Scientists (SAIMS)|
|Journal||Management Dynamics : Journal of the Southern African Institute for Management Scientists|
|Author||P.D. Erasmus and I.J. Lambrechts|
|Publication Date||Jan 2006|
|Pages||14 - 26|
Enterprises endeavouring to maximise shareholder value often employ Net Present Value (NPV) techniques in an attempt to achieve their financial objectives. Since Economic Value Added in monetary terms (EVAmon), Economic Value Added in real terms (EVAreal), and the measure Cash Flow Return on Investment (CFROI) focus on the maximisation of NPV, their implementation could contribute to the creation of shareholder value. In this study, these measures are critically compared. Firstly, the advantages and the disadvantages of the methods are discussed briefly. Secondly, the assumptions of the model developed to compare the measures, and the calculations to be made in order to arrive at meaningful conclusions are highlighted. The study finds that EVAmon is not always suited for use as a financial performance measure. The measures EVAreal and CFROI provide very similar results in the majority of cases investigated. The study identifies those situations where conflicting results are obtained, and attempts to explain the reasons for these phenomena.
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