EVA - Baap of ROI/trending method for BoxOffice

The first and foremost measure of performance that comes to one’s mind is profit/ROI- the accounting measure of performance. Someone has aptly said- profit is an opinion, not the fact. If this were not case , one would not have seen the debacle of big companies like Enron, World Com etc. All such companies managed their earnings well and have shown better performance in terms of ROI.

The thing is traditional measures ignore the definite requirement that the rate of return should be at least as high as the cost of capital.The cost of capital is the rate of return required to persuade the investor to make a given investment.Or a bare minimum margin which the investor expects by making a certain amount of investment.Economic Value Added (EVA) is a financial performance method to calculate the true economic profit of an investment. EVA can be calculated as net income minus a charge for the opportunity cost of the capital invested.

If EVA = 0 , Investment value neither added or eroded

EVA >1 , Investment value enhanced

EVA < 1 ,Investment value eroded.

The biggest catch of EVA is that it can be negative even for investments which have positive income!

EVA takes into account some major factors - it takes earnings,the expectations of the investor (cost of capital),time value of money,opportunity cost of capital.The only tricky thing  in this is to arrive at the cost of capital. But there is a way to it.

During ETT ,I heard a lot of ppl trash its performance.They said  it didnt maximise its market potential as 3 idiots did in 2009; even though the BO gross between the two was not much different.I will now calculate the  margin of 3i and will assume this as the cost of capital for other films to arrive at the EVA. By doing so, I wil be able to judge the films taking 3i as the parameter for trending,inflation,acceptance and so on. I am basically making the investors of those films act as if they are investors of 3i.

Financials of 3i:

Investment	Rs. 65.00
Indian	Rs. 111.10
Overseas	Rs. 35.00
	Rs. 146.10
Cost of capital	25%
Traditional Net Income
Revenue	Rs. 146.10
Total	Rs. 146.10
Deduct investment	Rs. 65.00	Return on Capital	124.77%
Net Income	Rs. 81.10
EVA
Market Value of Capital	Rs. 65.00
x Cost of Capital	25%
Dollar Cost of Capital at Market Value	Rs. 16.25
Net Income	Rs. 81.10
- Cost of Capital	Rs. 16.25
Economic Value Added	Rs. 64.85

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now, 25% will be taken as the cost of capital .By definition,if EVA is less than 1,it means the investment's value is eroded.

Ek Tha Tiger:

Investment	Rs. 90.00
Indian	Rs. 110.00
Overseas	Rs. 25.00
	Rs. 135.00
WACC	25%
Traditional Net Income
Revenue	Rs. 135.00
Total	Rs. 135.00
Deduct investment	Rs. 90.00	Return on Capital	50.00%
Net Income	Rs. 45.00
EVA
Market Value of Capital	Rs. 90.00
x Cost of Capital	25%
Cost of Capital at Market Value	Rs. 22.50
Net Income	Rs. 45.00
-  Cost of Capital	Rs. 22.50
Economic Value Added	Rs. 22.50

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Rowdy Rathore:

Capital	Rs. 75.00
Indian	Rs. 72.60
Overseas	Rs. 8.10
WACC	25.00%
Traditional Net Income
Revenue	Rs. 80.70
Income	Rs. 80.70
Deduct capital	Rs. 75.00	Return on Capital	7.60%
Net Income	Rs. 5.70
EVA
Capital employed	Rs. 75.00
x Cost of Capital	25.00%
Cost of Capital at Market Value	Rs. 18.75
Net Income	Rs. 5.70
-  Cost of Capital	Rs. 18.75
Economic Value Added	-Rs. 13.05

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Agneepath

Capital	Rs. 75.00
Indian	Rs. 67.65
Overseas	Rs. 14.85
WACC	25.00%
Traditional Net Income
Revenue	Rs. 82.50
Income	Rs. 82.50
Deduct capital	Rs. 75.00	Return on Capital	10.00%
Net Income	Rs. 7.50
EVA
Capital employed	Rs. 75.00
x Cost of Capital	25.00%
Cost of Capital at Market Value	Rs. 18.75
Net Income	Rs. 7.50
- Cost of Capital	Rs. 18.75
Economic Value Added	-Rs. 11.25

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Barfi:

Capital	Rs. 50.00
Indian	Rs. 50.40
Overseas	Rs. 13.50
WACC	25.00%
Traditional Net Income
Revenue	Rs. 63.90
Income	Rs. 63.90
Deduct capital	Rs. 50.00	Return on Capital	27.80%
Net Income	Rs. 13.90
EVA
Capital employed	Rs. 50.00
x Cost of Capital	25.00%
Cost of Capital at Market Value	Rs. 12.50
Net Income	Rs. 13.90
-  Cost of Capital	Rs. 12.50
Economic Value Added	Rs. 1.40