Introducing a Real Option Framework for EVA/MVA Analysis

28 Pages Posted: 15 Oct 2020

See all articles by Tom Arnold

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

Timothy Falcon Crack

University of Otago

Cassandra D. Marshall

University of Richmond - Department of Finance

Adam Schwartz

Washington and Lee University - Department of Business Administration

Date Written: August 17, 2020

Abstract

For the first time, a framework is introduced that allows for a real options analysis to be performed in an EVA/MVA-embedded binomial tree. This framework enhances traditional EVA/MVA analysis so that it can capture the additional value generated through strategic decision making during a project’s life. The EVA calculation is separated into three parts: a variable component, a fixed component in regard to the cash flow, and a fixed component in regard to the cost of capital. A reconciliation of methods shows that the EVA/MVA framework produces the same real option valuation as an equivalent NPV-embedded binomial tree.

Keywords: economic value added, EVA, market value added, MVA, real option, binomial tree

JEL Classification: G13, G00, G30

Suggested Citation

Arnold, Thomas M. and Crack, Timothy Falcon and Marshall, Cassandra Dawn and Schwartz, Adam, Introducing a Real Option Framework for EVA/MVA Analysis (August 17, 2020). Available at SSRN: https://ssrn.com/abstract=3681473 or http://dx.doi.org/10.2139/ssrn.3681473

Thomas M. Arnold (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

102 UR Drive
University of Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

Timothy Falcon Crack

University of Otago ( email )

P.O. Box 56
Dunedin, Otago 9010
New Zealand

Cassandra Dawn Marshall

University of Richmond - Department of Finance ( email )

1 Gateway Rd
Richmond, VA 23173
United States

Adam Schwartz

Washington and Lee University - Department of Business Administration ( email )

Lexington, VA 24450
United States

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