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Divisional performance appraisal and transfer pricing

EVA

6.1 What is EVA?

 A similar but superior measure to RI for appraising divisional
and organisational performance.

 Adjustments are made to profit and capital employed figures
to truly reflect the economic value generated by the
organisation.

6.2 Calculating EVA

$
Net Operating Profit After Tax (NOPAT) (W1) X

Less:
Adjusted value of capital employed at beginning of the year (W2)
× WACC (W3) (X)
––––

EVA X/(X)
––––

Decision rule: Accept project or assess division/company as performing favourably
if EVA is positive.

In reality, there are over 100 possible adjustments that could be made
to the profit and capital employed figures. Some of the more
examinable ones are shown below.

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