1. Can you provide examples of accounting adjustments required to compute EVA^TM)?
2. Why is EVA^TM) preferred to ROI?

The financial mission of a company should be to invest and create cash flows in excess of the cost of capital. If an investment is announced that is expected to earn in excess of the cost of capital, then the value of the firm will immediately rise by the present value of that excess – as long as the market understands and believes the available projections. The question is: What is the best way to measure this?
Traditional measures of return, such as ROI, actually could unwittingly motivate and reward managers to shrink the value of the company. Therefore, the concept EVA(^TM) was developed. In a nutshell, EVA(^TM) is designed to measure the degree to which a company’s after-tax operating profits exceed – or fall short of – the cost of capital invested in the business. It makes managers think more about the use of capital and the amount of capital in each business.
Armstrong World Industries Inc. is a multi-billion- dollar manufacturer and supplier of floor coverings, insulation products, ceiling and wall systems and installation products. The decision was made to discontinue the ROI concept and use EVA(^TM) for strategic planning, performance measurement, and compensation. EVA(^TM) is computed from straight-forward adjustments to convert book values on the income statement and balance sheet to an economic basis. Armstrong used about a dozen adjustments. Armstrong considered EVA(^TM) to be the best financial measure for accurately linking accounting measures to stock market value and performance, making it ideal for setting financial targets. Changes in behaviour have become focused on three basic actions: 

(1) Improving profit without more capital;
(2) Investing in projects earning above the cost of capital;

(3) Eliminating operations unable to earn above the cost of capital.
On a higher strategic level, EVA(^TM) allowed Arm-strong to step back to see where the company was losing value. In what the company called its ‘sunken ship’ chart it was clear that businesses earning above the cost of capital were providing huge amounts of EVA(^TM). However, the ship was being dragged down because of negative EVA(^TM) businesses and corporate overhead. By selling or combining negative EVA(^TM) businesses, and by growing and further reducing costs in its positive EVA (^TM) businesses, the company provided the potential to more than double its EVA(^TM).