How can you cope with these distortions of EVA

• You have at least two good ways to try to fix these distortions

  (These methods (1 and 2) are totally different and can not be used at the same time/in similar cases as alternatives)

  • Method 1:
    • Modify your depreciation schedule so that the periodizing problem vanishes: When depreciations are flat or emphasized at the beginning of investment period -> EVA emphasizes at the end of the period. If depreciations are low at the beginning (compensating high capital cost) then this problem of “unevenly distributed EVA will vanish)
  • Method 2:
    • Estimate the current value of assets and use this as a basis of calculations (instead of book value of assets)
• Another possibility is that you just assess these distortions and thereafter measure your performance with EVA just as before (when you know the direction of the problem and have some - although vague - estimation about the effects on your EVA you’ll probably do quite well even though you do not correct the problem)
  • Consideration (not trying to fix this but considering these effects in interpreting information)

Slide 10 of 11