Integration of Net Present Value (NPV), Economic Value Added (EVA), and Free Cash Flows (FCF)

Abstract

To date, ignorance seems to persist about the link between these three concepts. The reason is probably that there is no unequivocal demonstration of the relationship between the concepts of Economic Value Added (EVA), Free Cash Flows (FCF) and the well-known traditional method of the Net Present Value (NPV). The decision makers are still wondering what relationship can truly exist between the EVA and their good old concept of the NPV whose application in the choice of investments or strategies would result in maximizing the value of their company. This article fills this gap by presenting a formal proof and a numerical demonstration. This article is circulating among the MBA students and executives for over ten years and I am always surprised by the need it fills with readers. One need only have a look in the financial literature to be convinced of the depth of ignorance about the interrelationship between these three concepts.

Note: Downloadable document is in French.

Keywords: EVA, NPV, FCF

JEL Classification: G31