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The following question related to question 1 ( Sep/Dec 2019) : https://www.chinaacc.com/zcms/contentcore/resource/download?ID=355139
Part (ii) the introduction of economic value added (EVA™) require the calculation of EVA. In calculation of capital employed at the start of the year for use in EVA, I see that in the answer, the marketing written-off which relates to the economic depreciation of $10m per year for the last 10 years are subtracted from opening capital employed at the beginning of 20X5.
– So I want to ask, whether economic depreciation totally separates from the accounting depreciation?, so this will lead to the fact that 100m is subtracted from capital employed at the beginning of 20X5 is acceptable . If economic depreciation and accounting depreciation have something in common, this will lead to the fact that 100m is subtracted from capital employed at the beginning of 20X5 is incorrect in arriving to the capital employed at the start of 20X5 to calculate EVA?
– Answer to part (iv) of the question stated that: “It would be important to identify that customers’ attitude to product reliability is not affected and that they see this service as necessary (maybe by benchmarking failure rates/machine downtime against competitors)”. I do not understand why customers’ attitude to product reliability can be affected by after-sale services, so I think it is unneccesary to have this sentence. And I do not understand why failure rates/machine downtime against competitors used as benchmarks?
ThanksEconomic and accounting depreciation are separate though sometimes to simplify a question you will be told that their amounts are identical so that there is no net adjustment needed for depreciation in arriving at NOPAT.
Keep separate in your mind the adjustments you need for NOPAT (generally relate to a single year’s amount) and the adjustments for CE which will often have historical effects eg expenditure for the last 10 years has to be capitalised.
With regard to the value chain and what service might add to it, I think that the answer is badly expressed. The point they are trying to make is that if most cars break down every 20,000km, but the company’s breaks down every 5,000, customers might begin to suspect that the company is artificially creating profit through bad quality production but high service costs. Such a manufacturer is unlikely to have a sustainable future.
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