Increasing shareholder value is a key performance objective for many profit-seeking organizations. As indicated in the chapter, EVA® is meant to approximate "economic income" and in this sense can be viewed as a measure of shareholder value added by the firm during a period. Increasingly, managers are realizing that shareholder value is enhanced by creating value for employees, customers, suppliers, the community, and other stakeholders. This problem ask you to consider how EVA®, as a measure of economic value created during a period, can be used to guide and justify sustainability-related investments.
Requirements
1. How is Economic Value Added (EVA®) for any accounting period estimated? How does this financial performance metric differ both from conventional accounting income and from residual income (RI)?
2. Given the definition of EVA® you provided in 1 above, provide some thoughts as to how EVA® can be used as part of a comprehensive performance-management system to assess and justify corporate investments in sustainability-related projects.
3. Search the Internet to see whether you can identify an example of how an actual company used EVA® to support a sustainability-related investment project or program (i.e., one that dealt with social or environmental performance).
4. Explain how EVA®, as a financial performance metric, can be used as part of a larger strategic management system?