EI and EVA calculation

Has anyone seen questions on them in any tests (sample, mock, schweser, stalla) I don’t remember the formula… EI = CF - chg in MV ??? EVA = NPV ???

EVA = NOPAT - $WACC = EBIT*(1-t) - WACC*Invested Capital

I have seen them…eva not bad…i hate EI just b/c I can’t remember it a lot

Was it economic profit or economic income? T/G

Econ Income = ATCF + chg. in market value Econ Profit = NOPAT - $WACC discounted at the WACC

it explained thoroughly in the CFAI text- Corp Fin. FYI- the Corp. Finance practice questions are great to work out the kinks. They are almost all multiple choice so no waste of time, but really highlight any deficiencies. The project valuation ?'s are tricky and the ?'s they have allow one to work out the kinks. EVA=EP=NOPAT - $WACC discounted at the WACC EI… Remove time t cash flow from project valuation, recalc’t NPV and subtract difference from original NPV from the CF

EI… Remove time t cash flow from project valuation, recalc’t NPV and subtract difference from original NPV from the CF akanska can you explain? it doesn’t make sense to me…

thx akanska CFAI text- Corp Fin. looks good

First you have all the future CF’s figured… so calculate their PV at T=t Now at t+1 you have realized the 1st CF. You now recalculate the remaining CF’s PV and add the difference [(PV t+1)-(PV t)] a negative number most likely to the CF from time t. make sense??

Economic Value Added is simply the Economic profit and it is your after tax EBIT, also known as net operating profit after tax (NOPAT) MINUS your dollar cost of capital (which is your capital: debt PLUS equity OR net working capital PLUS Net fixed assets (gross MINUS accumulated depreciation) ----> EVA=EP= NOPAT-$WACC (capital *WACC) Economic income is the after tax cash flow for the year minus economic depreciation ATCF = Operating Income * (1-Tax) + Accounting Depreciation (this is just the regular deprciation) Economic Depreciation= Change in Value of Project -->So if you had a project that produced $1 in year 1, $1 in year 2, and $1 in year 3 its Value at time 0 is 2.48 (that is with a wacc of 10%). After year 0, in year 1 when you have already reaped the benefit of the first payment, it remaining payments are 1 in year 2 and 1 in year 3, its new value is 1.73 (again the 2 payments discounted at a wacc of 10%). The economic depreciation is the change in MV and would be 2.48-1.73=.75 SO if your ATCF is $2 then your economic income is 2-.75=1.25 Abracadabra

Guys, a quick shortcut if you need to solve for EI: It’s a one liner in the CFAI text, but the EI is always equal to the required rate of return multiplied by the beginning market value.

The likelihood of them providing the beg. Market Value is slim to none, so you’re going to have to do some variation of a NPV calculation to determine the “beg. mkt. val.”.

I could be wrong, because I can’t remember the details, but I believe they did give the beginning market value on one of the sampe exam q’s.

I think they would almost have to give you beg. mkt value… the formula is EI = ATCF + chg. in Mkt Value… Either way… this is an ez formula to remember and shouldnt cause anybody trouble… (as I knock on wood)

I can see them giving the beg. mkt. val. on period 1 and then asking for EI in period 3. I just doubt they are going to offer that much of a give me…we can all hope though!

chadtap Wrote: ------------------------------------------------------- > I think they would almost have to give you beg. > mkt value… the formula is > EI = ATCF + chg. in Mkt Value… > > Either way… this is an ez formula to remember and > shouldnt cause anybody trouble… (as I knock on > wood) Why would they “have” to give you beg. mkt. val.? Market value is just the discounted future cash flows (an NPV calculation), so there is no need to spoon feed the info.

yeah you may be right SB… Im kinda overanalyzing the situation…long week… I think I need a beer or 20…

Dude, relax, I was just pointing out an easy to remember time saver if you see an easy q, but just remember this is CFAI and not Schweser, many times, they just want to make sure you know what EI is, although it could easily be harder than that as you said. I’m not saying substitute my shortcut for knowledge of EI concepts, you know my stances on short cuts, skipping texts, etc, I mean, I don’t even use Schweser for god’s sake. Of anyone here, I’m probably one of the strongest advocates for the concept of nothing but extreme prep gets you there on game day. That being said, the question as I remember it on the CFAI sample exam was the MV at the beginning of the period, and it simply asked for EI in period 1. I didn’t know this short cut at the time, still got it right, but later when I saw this, thought it was a great way to save time if I saw this again, and that was the only reason I posted it. Regardless, I have full faith in everyone here, and as CFAFS1 pointed out earlier after one of my notoriously snappy comments, alot of the tension on this forum right now comes from the fact that we are absolutly ready for game day and chomping at the bit to put this thing away, lets do this thang.

No tension here, and sorry if you misinterpreted my response…wasn’t dissing you.

Black Swan, that is a nice shortcut. I will use it …