Investment Center Definition and Performance Measurement
📌 An investment center is defined as a responsibility center where manager performance is evaluated based on the profit earned relative to the investment utilized in operations.
📈 Performance measurement is based on the ratio between profit generated and the investment assets employed.
🎯 Key objectives include providing managers with information on operating assets, motivating optimal decision-making, and measuring the performance of both the manager and the business unit.

Investment Center Decision-Making Goals
⚖️ Managers are tasked with deciding whether to increase investment if the return is adequate or to divest/reduce investment if the return is poor.
💰 A primary goal is ensuring the unit generates an adequate profit commensurate with the authority and decisions made.

Investment Measurement Bases: ROI vs. EVA
💲 Return on Investment (ROI) is calculated as income divided by the assets used, encouraging managers to focus on sales/expense relationships and asset/cost efficiency.
📉 A weakness of ROI is that it can lead to a narrow focus on divisional profitability, potentially harming overall company profitability and encouraging short-term gains over long-term strategy.
🧮 Economic Value Added (EVA) is the difference between net operating profit and the capital charge (assets used multiplied by the cost of capital rate).

EVA Advantages and Application
🌟 EVA analysis helps determine if an individual project should be accepted or rejected, driving behavior consistent with increasing shareholder value.
👍 EVA has four advantages, including providing a uniform profit target across business units, making investments earning above the cost of capital more attractive, allowing for different cost of capital rates for different asset types, and having a stronger positive correlation with market value changes.
📉 EVA thresholds determine value addition: EVA > 0 indicates value creation; EVA = 0 means the company breaks even on capital costs; EVA < 0 suggests the available funds do not meet creditor or shareholder expectations.

Comparison of ROI and EVA in Practice
📜 Conceptually, EVA is superior to ROI, yet surveys show ROI is used more frequently in business practice.
👍 ROI remains popular because it is a comprehensive metric, easy to calculate and understand, and serves as a common denominator in investment center reporting.

Differentiating Economic vs. Management Performance Evaluation
📊 Economic performance evaluation involves irregular reporting, focuses on diagnosing strategy success, assesses the organization as a whole, and focuses on future earning potential (present value of future profit).
👩‍💼 Management performance evaluation involves periodic reporting (e.g., every period), uses historical data and actual historical costs, and focuses primarily on current period profit.

Elements of an Investment Center
📦 Key elements comprising the investment base include cash, receivables, inventory, property, plant, and equipment, as well as intangible assets and idle assets.
💰 Capital charge calculations involve current assets, non-current liabilities, and working capital considerations.

Key Points & Insights
➡️ Investment centers are evaluated based on the return generated relative to the assets invested.
➡️ EVA is theoretically better as it aligns manager incentives directly with increasing firm value, unlike ROI's potential for suboptimization.
➡️ Despite EVA's superiority, ROI is more commonly utilized due to its simplicity and established use as a standard measurement tool.

📸 Video summarized with SummaryTube.com on Jan 06, 2026, 03:54 UTC