Why would the calculation of economic value added (EVA)alleviate the shortcoming of the return on investment measurement?
A)Because it is required by generally accepted accounting principles.
B)Because it is required for Securities and Exchange Commission reporting.
C)Because it assures compliance with Internal Revenue Service Code requirements.
D)Because managers many not accept good investment opportunities if the ROI of the investment is lower than the present ROI of the division.

Question

Quizplus · Accepted Answer

Return on investment (ROI) only focuses on the profitability of an investment and doesn't take the cost of capital into account. Economic value added (EVA) takes into account the cost of capital and compares it to the return on investment, providing a more accurate measure of the true economic value generated by the investment. This can alleviate the shortcoming of ROI where managers may reject potentially good investments if they don't meet a certain ROI threshold.

Why Would the Calculation of Economic Value Added (EVA)alleviate the Shortcoming