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Hi Sir,
I do not quite understand the answer given – EVA encourages investment for the future (eg advertising and development) by removing such cost from the performance period and treating them like capital expenditure. This will reduce the dysfunctional temptation for management to engage in some short term decision making which can be a problem with capital employed figure …..
I know for EVA, we need to add back all those capital expenditure and using the NOPAT – wacc* capital invested? This capital invested doesn’t include the development costs/advertising cost?
Do not quite understand the answer given.
Thanks
Hi Sir,
Will appreciate if you can explain on this statement “EVA encourages investment for the future (eg advertising and development) by removing such cost from the performance period and treating them like capital expenditure. This will reduce the dysfunctional temptation for management to engage in some short term decision making which can be a problem with capital employed figure …..”.
Thanks!
In ordinary accounting, research costs are written off. This reduces profits. Profits could be increased in the short time by having no research. EVA does not deduct research costs to get NOPAT, so there is no incentive to cut back on research.
Of course, no research expenditure is fatal for long-term profitability.
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