Question

Compare and contrast the four performance measures 1) FCF 2) ROIC 3) MVA & 4) EVA

Answer 1

1-Free cash flow is the cash that company produces from operations after meeting all the working capital and investment in capital expenditure. Free cash can be used for expanion and modernization. Free cash flow denotes the free cash available with the company but it does not focus on profitability measure of organization

2- Return on Invested capital is a percentage rete of return that measures the profitability of the company. it is the rate of return earned on invested capital. it is compared with WACC to measure the performance of the company. it is a superior concept over free cash flow as it measures the profitability and used in selection of best alternative.

3- Market value added- is the concept which measures the value added during a particular period. it is the difference between the market value of the company and invested capital. it is a performance measurement tool that computes for the increase in the value of the company's stock price. it is used by shareholders to know the added market value over its investment. it is a wider concept in comparison of free cash flow and ROI as both focus on overall cash flow and profitability while its focus on shareholders wealth.

4- Economic value added- it is calculated by comapring NOPAT and cost of capital. it is used to measure the performance of internal management. if NOPAT is greater than cost of capital it means economic value has increased if it is less value has decreased. it serves as a measure of profitability of the project undertaken and also used as performance indicator of internal management.