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    Economic Value Added and NPV and IRR

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    Explain Economic Value Added and compare it with NPV and IRR methods of capital budgeting in terms of capital budgeting project evaluation methods.

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    Economic Value Added, IRR, and NPV:

    Economic value added is a method of estimating the company's economic profit by determining the difference between actual rate of return of company on its assets and cost of capital raised by company (Brigham and Houston, 2012). The value created from the difference between rate of return on investment and cost of capital may be positive or negative. If the value is found negative, it means the investment made by the company is not worthwhile. Economic Value Added is computed by multiplying net profit of the company with the value obtained from the difference between the actual return and total cost of capital (Chron, 2016). Today, organization has objectives of wealth maximization of its shareholders that is possible if the ...

    Solution Summary

    Economic value added (EVA) provides a useful method for evaluating a company's economic profit and making some important inferences about the company performance based on that. This can be also used as a project evaluation method. This response also compares EVA method with NPV and IRR in brief.