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CA Final · Advanced Financial Management · Business Valuation

Which statement about EVA is correct under the standard approach taught for business valuation?

The correct statement is that capitalising items such as R&D, adding them back to NOPAT and invested capital, is a standard EVA adjustment. EVA charges for all capital, so profit alone is not enough, and MVA reflects the present value of expected future EVAs rather than one year's EVA.

  1. AEVA is computed using accounting profit after interest, without any capital charge
  2. BAdding back R&D expenditure treated as an investment is a typical EVA adjustment to NOPAT and capitalCorrect
  3. CEVA is always equal to MVA in the same year
  4. DA positive EVA means the firm's net profit is positive, regardless of cost of capital

Explanation

EVA uses NOPAT less a charge for all capital, and accounting distortions are adjusted, for example by capitalising R&D and adding it to invested capital. Options A and D ignore the capital charge. MVA is the present value of future EVAs, not equal to current EVA.

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