Question

Under the operating approach to estimating EVA for an investment center (business unit), EVA capital is found by taking ______.

Option 1: Net income
Option 2: Total assets
Option 3: Total liabilities
Option 4: Total invested capital

Answer 1

To estimate EVA for an investment center, EVA capital is found by taking Total invested capital.

Step-by-step explanation:

The approach to estimating Economic Value Added (EVA) for an investment center (business unit) involves finding the EVA capital by taking Total invested capital which corresponds to Option 4. This is due to EVA being a measure of a company's financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit. This approach helps managers and investors to understand how well the investment center is using its funds to generate returns over and above the cost of capital. In practice, calculating EVA requires adjustments to the reported financial statements, especially concerning the way capital is accounted for and the cost of capital.