We researched Coca-Cola and Pepsi, as requested, to see which one would be a better investment than the other. One way to know how a company is performing is to look at the amount of economic value added (EVA) it produces. EVA is a way of measuring the real profitability of an operation. EVA is better than conventional methods because it takes into account the total cost of operating capital. EVA is simply the after-tax operating profit minus the total annual cost of capital. There are both advantages and disadvantages to using EVA. Advantages · EVA sends the message that managers should only invest if the increase in profits is sufficient to cover the cost of capital · EVA allows companies to implement a reward system that is not too costly to implement work because is not too difficult for senior management to monitor. · EVA makes the cost of capital visible to operational managers. · Stock prices follow EVA more closely than they follow other popular measures. projectsDisadvantages · EVA does not involve forecasting future cash flows and does not measure present value. · EVA therefore rewards managers who undertake projects with rapid returns on investment and penalizes those who invest in projects with a long gestation period. · Need to modify income statements and balance sheets to measure economic value. Looking at the historical trends of Coca-Cola and Pepsi in terms of EVA, we see that Coca-Cola's EVA has been slowly decreasing while PepsiCo's EVA has been increasing (see Exhibit 1.1). Coca-Cola's NOPAT has declined in recent years due to slowing sales growth and deteriorating profit margins. Without Coca-Cola's decreasing WACC, its EVA would decrease more quickly. If Coca-Cola had used a WACC of 12%, about the average of the last seven years, its EVA would have been $445,000,000 in 2000. PepsiCo was able to more than double its EVA in 2000 thanks to a higher NOPAT and a lower WACC. The higher NOPAT was mainly due to improved margins which led to higher ROI. The key to EVA is the gap between ROI and WACC. It is important to invest the capital at a higher rate than that at which the capital is obtained. In theory, as long as there are enough projects that produce ROI > WACC and enough capital provided, EVA can grow indefinitely. the weighted average cost of capital (WACC) is important. Now let's see what WACC is and why it is important..