Question

An indicator of financial performance of business units (investment centers) that is designed to approximate the unit's economic profit generated by the unit during a given period is called ______.

Option 1: Return on Assets (ROA).
Option 2: Economic Value Added (EVA).
Option 3: Return on Investment (ROI).
Option 4: Gross Margin Ratio.

Answer 1

The financial performance indicator designed to approximate a business unit's economic profit is called Economic Value Added (EVA), which includes net operating profit and cost of capital.

Step-by-step explanation:

An indicator of financial performance of business units (investment centers) that approximates the unit's economic profit generated during a given period is called Economic Value Added (EVA). EVA is used to assess the value a business unit adds above the required return on its capital.

Variables taken into account include net operating profit after taxes and the cost of capital invested in the unit. This measure helps in understanding actual economic profit as opposed to just accounting profit which accounts for overt costs but not opportunity costs or the cost of capital.