Defining capital costs correctly

• With EVA approach capital costs are intended to define as correctly as possible (as all the other costs). Capital costs are not supposed to set to some kind of target level:
  • Some companies have understood EVA controlling in the same way than ROI-controlling; if an unit produces a good return then also capital costs are set to a high level. This kind of procedure is against the whole EVA approach: the challenges are supposed to build in EVA-targets and not into capital costs because the whole idea is to enable and encourage to make all the investments that offer a return grater than the alternative investments
• Also all other kind of manipulating of capital costs is not wise:
  • Some companies have “simplified” the raporting by building the tax-costs into capital cost rate (so there is no taxes in reporting but capital cost percentage is a little bit higher than normally. This is not recommandable for two reasons:
    • 1. Taxes are calculated wrongly because in this method they depend on capital base and not on the result
    • 2. Capital costs are defined too high and thus in operating activities capital is viewed more expensive than it really is and thus optimal inventory etc. levels are not maintained