Question

Why economic value added is more adaptable in business world?

Answer 1

The economic value added is can be defined as a tool used to measure the financial performance of a company. It is calculated by deducting the cost of capital from the operating profit as adjusted for the taxes payments.

Economic Value Added= Net Operating Profit After Tax - (Total Assets - Current Liabilities) * Weighted Average Cost of Capital

Adaptability means the capacity that ensures that the company is able to bounce back and survive when the situation is adverse. Economic Value Added (EVA) is important and more adaptable in the business world because it is an indicator of the profitability of the company's projects. It is a measurement of the performance of the management.

The economic value added is more adaptable in the business world as the economic value is decided by the company's factors which are variable in nature. The cost of capital, rate of taxes and the profit earned keeps on fluctuating . And if the rates and cost increases which thereby decreases the profit this gives birth to an adverse situation for the financial health of the company. How the economic value added helps in normalising the changes with respecis the ability of adaptability. This is the economic value added by the company which is sufficient enough to bounce back to normal situation in case any financial crises arises.That is why we can conclude that the economic value added is more adaptable in the business world.