Question

When estimating EVA or residual income (RI) or return on investment (ROI), it is recommended that the level of investment (capital or assets employed) be measured as ______.

Option 1: Beginning-of-year book value of assets.
Option 2: Average book value of assets.
Option 3: End-of-year book value of liabilities.
Option 4: Accumulated depreciation.

Answer 1

For calculating EVA, RI, or ROI, the average book value of assets is the recommended measure for investment level, as it accounts for the value change over time.

Step-by-step explanation:

When estimating Economic Value Added (EVA), Residual Income (RI), or Return on Investment (ROI), it is recommended that the level of investment, which refers to capital or assets employed, be measured as the Average book value of assets. This approach takes into account the change in asset value over the period, rather than just the beginning or the end, providing a more accurate reflection of the investment base over time. In business finance, using average values helps in making more precise calculations of these performance metrics.