From Economic Profit to Present Value to EVA

摘要

Since the 1700's, economists have recognized that in order for a firm to create wealth, it must earn more than its cost of debt and equity. The engineering economist Wellington in his 1880's book on the economics of railways stressed that an investment must cover its cost of capital. Early in the twentieth century, this concept, known then as Economic Profit, appeared in accounting theory literature. Early in the 20~(th) century General Motors and DuPont applied this concept, with General Motors dubbing it 'residual income' in the 1950s. In the 1960s residual income appeared in management accounting literature. More recently, the concept of residual income has gained widespread recognition under the New York based consulting firm Stern Stewart & Co.'s label Economic Value Added (EVA). Introduced and popularized by Stern Stewart in 1989, now more than 300 firms worldwide are using EVA to measure their financial success. Giants such as Coca-Cola, AT&T, Sprint, Brigg & Stratton, and Goldman Sachs claim that EVA is the best indicator of stock performance. On close examination, it is apparent that EVA is closely related to the engineering economy concept of Present Value. It is proposed that the EVA method of calculation, given its broad appeal, should be adopted by the engineering economy community as a suitable method for presenting the concept of Present Value.