CVA Calculation
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CVA Calculation |
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Cash Value Added |
Summary of CVA Calculation. Abstract |
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A CVA calculation includes only cash items, i.e. Earnings Before Depreciation Interest and Tax (EBDIT, adjusted for non cash charges), working capital movement and non-strategic investments. The sum of those three items is the Operating Cash Flow (OCF). The OCF is compared with a cash flow requirement, "the Operating Cash Flow Demand" (OCFD). This OCFD represents the cash flow needed to meet the investor's financial requirements on the company's strategic investments, i.e. the capital cost.
Instead of measuring the investor's opportunity cost of capital in percentage terms the CVA model uses the investor's opportunity cost of capital in cash terms. The difference between the OCF and the OCFD is the CVA. The CVA for a period is a good estimate of the cash flow generated above or below the investor's requirement for that period. This analysis can be done at each level of the company and the CVA for the company is the aggregate CVA of its Strategic investments.
Financial Value
Residual Income
Cash Flow
Economic Profit
Sales
- Costs
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Operating Surplus
+- Working Capital Movement
- Non-strategic Investments
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Operating Cash Flow
- Operating Cash-Flow Demand
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Cash Value Added - CVA
Unlike Market-based measures, such as MVA, CVA can be calculated at divisional (Strategic Business Unit) level.
Unlike Stock measures, CVA is a flow and can be used for performance evaluation over time.
Unlike accounting profit, such as EBIT, Net Income and EPS, CVA is Economic and is based on the idea that a business must cover both the operating costs AND the capital costs.
Book: Andrew Black - Questions Of Value: Master The Latest Developments In Value-based Management, Investment & Regulation
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