This connection between economic value added and NPV
allowsustolinkthevalueofafirmtotheeconomicvalue
addedbythatfirm.To seethis,letusbeginwitha simple
formulationoffirmvalueintermsofthevalueofassetsin
place and expected future growth.
Notethatinadiscountedcashflowmodel,thevaluesofboth
assetsinplaceandexpectedfuturegrowthcanbewrittenin
terms of the net present value created by each component.
Substitutingtheeconomicvalueaddedversionofnetpresent
value into this equation, we get:
Thus,thevalueofafirmcanbewrittenasthesumofthree
components:thecapitalinvestedinassetsinplace,thepresent
valueoftheeconomicvalueaddedbytheseassets,andthe
expectedpresent valueof theeconomic valuethat willbe
added by future investments.
ILLUSTRATION 6.7: Discounted Cash Flow Value and
Economic Value Added