Using The EVA Financial Management System To Make The Wrong Decision

Abstract

EVA may result in underinvestment problems and suboptimal strategies used to boost near-term performance at the expense of the future. To solve these problems, a new measure, CFMAC, is developed. This paper describes the types of problems associated with the EVA Financial Management System that includes use of the EVA measure and compensation schemes touted by EVA proponents. A new annual measure, cash flow minus amortized capital (CFMAC) is developed to address the problems inherent to EVA.