Profit = Project Management Partners with Finance to Use EVA

  Earned Value Management   Knowledge Shelf  

It goes without saying that the goal of project management has always been to assist executive leadership in a company’s growth. Not only during a recession, but also during an economic boom, project management can help companies invest only in those projects that boost their bottom line. One of the best ways of selecting a project is by utilizing economic value added (EVA) methodology. This methodology is also considered a criterion of project acceptance. EVA requires effective collaboration between finance and project management, an alliance that not only enables the project management professionals to understand how the company’s finance works, but also allows them to assist business leaders in making better financial decisions

The EVA is a registered trademark of Stern Stewart & Co. With EVA, a project should be accepted only if the net operating profit after taxes (NOPAT) of the company exceeds the cost of capital. A positive EVA creates value for the common stockholders, the owners of the company. In other words, the company should select the project only if its return on investment exceeds the cost of capital. All of the decisions from senior management to production and project level will pass through the EVA scanner.

Cost of capital refers to the total of cost of debt and equity financing (Block, Hirt, & Danielsen, 2009). When the company…

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