Using EVA As A Decision Metric In Capital Budgeting

Abstract

Economic Value Added (EVA) has been growing in popularity within the business community as a measure of both value and performance. Despite this growth, EVA has yet to receive significant attention in the academic literature, particularly in micro decision-making areas such as capital budgeting. This paper examines the efficacy of EVA as a capital budgeting decision-making aid. Although a theoretical link between EVA and net present value (NPV) has been noted, issues related to its implementation have yet to be addressed. Our analysis details conditions under which EVA produces managerial decisions similar to those obtained by the NPV rule. Contrary to some claims, we find EVA and NPV produce different accept/reject decisions in a variety of commonly encountered capital budgeting situations.