What is economic added value and market added value, and what is the difference between them?

As the name implies, the difference between economic added value and market added value lies in two aspects: economy and market. First of all, we must clarify the meaning of two added values!

What is economic added value? The concept of economic added value comes from residual income. Because the activities of improving the department's return on investment sometimes reduce the company's value, industry and theoretical circles have put forward an alternative performance evaluation method, that is, using residual income to overcome the limitations of return on investment. The net income before tax minus the cost of capital is the residual income. Increase those investments whose income exceeds the cost of capital or decrease those whose income is lower than the cost of capital, and the residual income will increase. Because the residual income method is conducive to the company's performance evaluation of the department and the activities that maximize the value of the department or company, it has greater advantages than the return on investment. In 1990s, the theoretical circle replaced the residual income with economic added value. The concept of economic added value expands the evaluation method of residual income from different angles: on the one hand, economic added value is based on the capital asset pricing model, which reflects the capital cost of the industry and the risk characteristics of the department, and can obtain the risk level of a professional and market-oriented independent business unit. On the other hand, in order to meet the needs of financial reporting, the economic added value is calculated after adjusting the information misinterpreted by generally accepted accounting standards.

So what is the added value of the market? Market added value refers to the difference between the market value of the company and the book value of the capital invested by investors. Maximizing market added value can increase shareholders' wealth.

The following is the calculation formula of market added value: The calculation formula of market added value is:

Market added value = total market value-total investment.

The total market value is the book value of liabilities and the market value of owners' equity. The total investment is the sum of the book value of liabilities and the book value of owners' equity.

The following is the analysis of market added value: market added value is directly related to net present value, which can measure the expected market added value of a project. The company can get the net present value of investment projects by compiling the capital budget statement. Managers of companies generally do not and should not choose investment projects that are expected to produce negative market added value.

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