The firm, described below, is using ROI measures. Part of the question that I am contemplating has to do with EVA and MVA. I am asked to describe both (got that), describe the benefits to each (got that too) and apply that to analyzing a fictional small-medium sized company currently using ROI. I have to show what the effect would be if they went to EVA or MVA, mainly in the effect on stock price and managerial incentive.
Here's the issue, if the firm fairly large and somewhat divisionalized, EVA doesn't make much sense to me. I understand the concept and benefits of weighing investments and costs over individual business units, but cannot see small-medium sized companies capacity to function on this scale. The case description implies that their stock price is not rising as quickly as competitors amidst similar financials. They also hit on the idea of EVA motivating individual managers performance, but again this seems to have more relevance to a larger company or conglomerate. Can anyone explain benefits of implementing either EVA or MVA in this sized company.
Here's a bit of the description that follows the case outlining some general information on the company.
A. Inventories are stated principally at cost (last in, first out), which is not in excess of market. Replacement
cost would be $2,796 more than the 1994 inventory balance and $3,613 more than the
1995 inventory balance.
B. Deferred tax expense results from timing differences in recognizing revenue and expense for tax and
reporting purposes.
C. On July 1, 1993, the company acquired CompuPay, a payroll processing and reporting service firm.
The acquisition was accounted for as a purchase, and the excess of cost over the fair value of net
assets acquired was $109,200, which is being amortized on a straight-line basis over 13 years. Onehalf
year of goodwill amortization was recorded in 1993.
D. Research and development costs related to software development are expensed as incurred. Software
development costs are capitalized from the point in time when the technological feasibility of
a piece of software has been determined until it is ready to be put on line to process customer data.
The cost of purchased software, which is ready for service, is capitalized on acquisition. Software
development costs and purchased software costs are amortized using the straight-line method over
periods ranging from three to seven years. A history of the accounting treatment of software development
costs and purchased software costs follows:
Here's the issue, if the firm fairly large and somewhat divisionalized, EVA doesn't make much sense to me. I understand the concept and benefits of weighing investments and costs over individual business units, but cannot see small-medium sized companies capacity to function on this scale. The case description implies that their stock price is not rising as quickly as competitors amidst similar financials. They also hit on the idea of EVA motivating individual managers performance, but again this seems to have more relevance to a larger company or conglomerate. Can anyone explain benefits of implementing either EVA or MVA in this sized company.
Here's a bit of the description that follows the case outlining some general information on the company.
A. Inventories are stated principally at cost (last in, first out), which is not in excess of market. Replacement
cost would be $2,796 more than the 1994 inventory balance and $3,613 more than the
1995 inventory balance.
B. Deferred tax expense results from timing differences in recognizing revenue and expense for tax and
reporting purposes.
C. On July 1, 1993, the company acquired CompuPay, a payroll processing and reporting service firm.
The acquisition was accounted for as a purchase, and the excess of cost over the fair value of net
assets acquired was $109,200, which is being amortized on a straight-line basis over 13 years. Onehalf
year of goodwill amortization was recorded in 1993.
D. Research and development costs related to software development are expensed as incurred. Software
development costs are capitalized from the point in time when the technological feasibility of
a piece of software has been determined until it is ready to be put on line to process customer data.
The cost of purchased software, which is ready for service, is capitalized on acquisition. Software
development costs and purchased software costs are amortized using the straight-line method over
periods ranging from three to seven years. A history of the accounting treatment of software development
costs and purchased software costs follows: