What is the added economic value?
Economic value is the calculation of corporate finances that determines the economic profit of the company. Economic profit is the difference between the costs of economic inputs and incomes created from the sale of inputs or goods produced with inputs. Economic profit differs from accounting profits, as economic profit includes capital costs concerning the generation of income obtained from financial transactions. The basic formula of the added value of the economic value is the net operating profit after tax (nad) minus the cost of capital. If the NAPTOP has $ 100,000 and capital costs of $ 40,000, the added economic value is $ 60,000. This concept and calculation were developed by Stern Stewart et al. The company has created a value -added formula as a way to improve NCE corporate finals used in the financial industry. According to his website, Stern Stewart and Co. worked together with more than 400 companies around the world on the development of formulas and improving its application in economic finance. While Stern Stewart and Co. The own trademark on the economic value formula is very similar to calculating the residual income used in business financing.
The residual income formula is a basic calculation of income remaining after the company has paid all its monthly expenses. Banks and creditors often used this formula to determine how much capital the company would have available to make fixed payments on loans or credit lines. The residual income formula also helped companies to determine how many cash flows could generate at certain levels of sales. The problem with this formula is that it does not count how much capital the company spends on business investing investment projects. Therefore, the formula of the added value of the economic value.
variations of the traditional economic value formula involves the use of the rate of return and cost of capital percentage. The basic formula of this varietyACE is a percentage of return on invested capital minus costs of capital percentage times of the original invested capital. This formula can be used in conjunction with other corporate financing formulas because it includes capital data. Companies can also use this method to distribute possible opportunities for banking loans and destinations offered by the creditor the company offers the highest economic value on projects.