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Freedom Circle Legit Or Not? Freedom Circle Review Scam Economic value added is the profit or loss, which is left after subtracting the cost of the price of all types of capital The Freedom Circle method of calculating the economic value added, namely: Economic Value Added = Net operating profit after taxes - the cost of capital employed.
Economic Value Added
The cost of capital is the minimum required to return from behind the Freedom Circle review capital investment in this particular project, in exchange for not investing in the alternative a chance.
We have spoken in a previous article about the importance of the added economic value and benefits of their application in the company and which reminded us of the benefits:
1. the proper way to calculate the profits of shareholders.
2. understand financial executives.
3.consistency between the administrative decisions and the wealth of shareholders.
4.interference diversity goals.
Today, God willing, we will talk about some of the weaknesses attributed to the economic value added and how they responded supporters and its supporters.
The first weak point:
Difficult economic value added accruing benefits from behind the use of new technology expense, I mean, for example, if we have developed a storage system in the company and made it happen automatically, instead of the traditional methods of inventory recording, it is difficult for us to determine the financial benefits realized from behind it accurately and therefore it is difficult added economic value of an investment account in this technology.
"Bennett Stewart" has responded and who devised the economic value added to that, he said: (economic value added does not make conversion technology benefits connections to the image of easy intake process, but it creates obvious; so that each addition and subtraction associated communications technology decisions operations, are in account the ways that companies that do not use economic value added find it difficult to do so).
It means this: that the economic value-added takes into account all the facts and figures; so close to the truth as possible, and this case is much better than no numbers or accounts of return from behind the use of technology.
The "Robert Egan," deputy director of communications in The Freedom Circle Foundation in conjunction with his colleagues in the process of analyzing investment in storage, and the decision was either to maintain their storage assets of existing, or that modern technology have lower maintenance costs, and the account numbers As follows:
Origins of modern technology cost = million dollars.
The cost of maintenance of modern technology assets = $ 100,000 per year.
The cost of the old asset maintenance = 350,000 dollars a year.
The cost of capital in the company is 16%, so the capital costs from behind the investment in new technology is 16% × 1,000,000 = 160,000 dollars, this amount must be added to the 100,000 annual maintenance of modern technology costs to calculate the economic value added accruing from behind to invest in modern technology .
The end result: the full cost of modern technology is 260,000 per year in exchange for 350,000 of the old stocks.
Here are wondering, Freedom Circle: (Does in this case have reduced operating costs enough to compensate for the cost of capital? Yes, including an estimated US $ 90,000), so the investment in this technology is profitable.
The second weakness:
Critics economic added value always assert that because of the existence of the cost of capital, will be out of the heads of corporate executives to invest for growth.
In response, Freedom Circle India branch of the company, "Stern Stewart & Co." manager on that, he said: (This talk is partly true, not true entirely: Economic Added Value is put an end to investment decisions, which would add value to the company, the defenders growth should know that unwanted growth is the only growth that adds economic value to the company).
This means that the economic value added, but encourage growth that adds value to the company, but simply growth for growth without economic return to the company, this is the one who prevented the economic value added.
To give an example:
In this example we are trying to compare the two giants of the giants of soft drinks in the modern era, the two Coca-Cola Company and PepsiCo.
Where the first company "Coca-Cola" using the economic value added as one of the modern system of financial management tools, while other "Pepsi" refrained from the use of such means.
During the past ten years, Coca-Cola added $ 4.3 billion of capital, ie 58% growth in the capital, while Pepsi's capital increased by about $ 19.6 billion, a 520% growth in its capital.
It may seem the rate of increase in the capital is much higher than Pepsi-Cola, but during these ten years, Coca-Cola has been able to this meager increase in capital to raise the market value of about 80.3 billion dollars, while Pepsi lifted the market value of about 27.7 billion only.
And that Coca-Cola has been able to find smarter ways to grow the lucrative Pepsi use of economic added value.
Succulent and it is another example; the US The Office Furniture Manufacturing Corporation "Herman Miller" could also raise the economic value added has through clever ways of profitable growth, such as Coca-Cola.
Within two years, sales have risen by about 38%, while the company reduced its construction is estimated at more than 15%, and in the last year, 1997 was the added economic value of the institution Miller $ 40 million, meaning an increase of about 300 percent from 10 million dollars, consisting in 1996, and was raise the share price of US $ 11 in late 1995 to $ 36 in late 1997.
Of course it's hard to be "Stern Stewart" and his supporters is biased in their responses, the new research often challenge the existence of close relationship between the "economic value added" high and rising shareholder value.
Overall growth is still famous concept of "economic value added," reflects the importance of the al-Qaeda organization, namely, that it should not neglect the cost of capital, but it must be at the forefront of investors' concerns.
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