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Prepared by Diane Tanner University of North Florida

Chapter 26. Economic Value Added. Prepared by Diane Tanner University of North Florida. Methods which help solve over-investment and under-investment problems Residual income Balanced Scorecard Goes beyond financial measures to include multiple performance dimensions

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Prepared by Diane Tanner University of North Florida

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  1. Chapter 26 Economic Value Added Prepared by Diane Tanner University of North Florida

  2. Methods which help solve over-investment and under-investment problems Residual income Balanced Scorecard Goes beyond financial measures to include multiple performance dimensions Economic Value Added Makes investing in profitable projects beneficial Evaluation Measurement Options

  3. A variation of residual income Potentially solves both over- and under-investment problems Compels investment in the range between required rate of return and current ROI Economic Value Added (EVA)

  4. Includes adjustments to assets and to income for certain items which are considered accounting distortions Removes the incentive for management to avoid spending money on costs which will enhance the long-term of business operations Treats certain costs as assets instead of the GAAP-mandated treatment as expenses How EVA Differs from Residual Income

  5. Begin with residual income Adjust for “accounting distortions”such as Research and development (R&D) Employee training Customer development These are expensed under GAAP EVA treats as capital expenditures Capitalize as an intangible asset Amortize over estimated life EVA – How it Works NOPAT +/- [Acctg Distortions, nt] [Invested Capital +/- Acctg distortions] EVA = ‒ CC

  6. The End

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