Investment Center Performance: Residual Income and EVA

The video tutorial explores three key metrics for assessing investment centers: Return on Investment (ROI), Residual Income, and Economic Value Added (EVA). It begins by defining an investment center as a responsibility center focused on generating returns. ROI is calculated by dividing operating income by operating assets. Residual income is the surplus income over expected returns, while EVA measures the value added beyond the cost of capital, considering both debt and equity. These metrics help evaluate the performance of investment centers within an organization.

What is the primary function of an investment center?

• To manage human resources

• To generate returns on allocated resources

• To oversee marketing strategies

• To handle customer service

How is Return on Investment (ROI) calculated?

• Operating income divided by total liabilities

• Operating income divided by operating assets

• Net profit divided by total revenue

• Net profit divided by total expenses

What does residual income represent?

• The total income generated by an investment

• The income above the expected return

• The income below the expected return

• The total expenses of an investment

Which of the following is considered when calculating Economic Value Added (EVA)?

• Total assets and total liabilities

• Total revenue and total expenses

• Net operating profit and weighted average cost of capital

• Net operating profit and total liabilities

What components are combined to determine the weighted average cost of capital?

• Profit and loss

• Revenue and expenses

• Assets and liabilities

• Debt and equity