The problem of unevenly divided EVA (3/3)

• As the earlier slides illustrated ROI can not describe the return of a single project since at the beginning of the project, when capital base is still big, the return is low and when the capital base gets smaller and smaller ROI shoots to the skies.
• Of course any firm is not made up from one single project and thus projects started at different times even out this problem a great deal.
• However firm have seldom totally even investment schedule. So it is seldom the case that a firm invests every year the same amount of money in fixed assets and that it would then have assets of all ages smoothly.
• Normally the assets have emphasis either on new investments (companies growing heavily) or on old investments (consider a old unit e.g. an old paper mill that has already depreciated almost all of its initial fixed investment)
• Thus the accounting return is often either understating or overstating the true return of the enterprise

Slide 5 of 11