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Sorry, I have not made a purchase from Amazon - so apperantly I can not visit the web site and get the whole quote in context.

But an economic profit is nothing more than accounting profit minus any opportunity costs. The opportunity costs are a management issue in that corporations should make the best "opportunity" choices and select those projects with the best net present value for the shareholders. This right or wrong choice of the best opportunity will, in the end, effect the returns you should use in your discounted cash flow. One of the considerations the corporation should use is - If the rate of return is less than the investor could achieve in capital markets. If this is the case, then the money should be applied to the shareholder, and the investor receives dividends.


So, in viewing a company, the economic value added (EVA) is the amount that the return on assets is greater than the opportunity costs of the invested capital. While this is a basis for a successful company and one that I would invest in, there are many considerations concerning the "opportunity costs" I do not see properly modeled. The ROA is usually forecasted very nicely. The amount of capital invested in a firm is also typically very precise. But the opportunity costs -going forward - of that capital is not so easily achieved. - especially as an investor in S&P

This is another data point {not the RAGE answer} but keep this in mind if using for investments.

Fortune Magazine calculated the EVA for some companies Nov 22, 1999
and putting them in a % return ROA over WACC

Cisco 35.1%
INTEL 22.5%
GE 7.4%
Exxon -2.6%
IBM -1.6%

And since 1999 -today's stock price is:
CSCO- About a 50% DECREASE
INTC- About a 20% DECREASE
GE - About a 25% DECREASE
XOM - About a 40% INCREASE over the S&P 500
IBM - About the same and equal to the S&P 500 returns

And the return on assets for XOM now is greater than Cisco and Intel and GE's is a very nice 2.27%.


So like everything else EVA past performance is not an indicator of future returns or,,, well EVA! It is a very good data point from history and you should consider the ability of a company to "Beat the Market" for you but it is still history.



DrTarr
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