Residual income
measure of income minus adollar amount for required return on an accounting measure of investment
RI = Income - (Required rate of return * Investment)
and investment in general = assets
as u know required rate of return is weighted average cost of capital for investment
but EVA is
EVA is After Tax operating income - (Wieghted average cost of capital *( total asset - current liability)
EVA substitutes the following numbers in the RI calculation 1) income = after tax operating income 2) Required rate off return = after tax weighted average cost of capital 3) invstment = Total asset - current liability
To Improve EVA manager must 1) earn more after tax operating income with the same capital 2) use less capital to earn the same after tax operating income 3) invest capital in high return project
EVA better than RI , but ROI is better in calculating percentage so we can calculate different projects performance has different capital ,
in general both methodes used to avoid the mistakes of depending on ROI only , in reality any organization should use combination between measure of performance ,,,,,,, and any more question , iam ur servant plz specify ur questions about opportunity cost and structure of capital
in general when interest rate increase in market the loan become lower in value ecause there is negative relation ship between NPV (Net present value ) and interest rate , and the value of loan of organization decrease by increasing interest raate of market ,
WACC and MCC , which one u ask about Weighted averag cost of capital or Marginal cost of capital , some authors use these words synomously
Salam