Sevilla Consulting offers environmental consulting servicesworldwide. The managers of branch offices are rewarded for superiorperformance with bonuses based on the economic value that theoffice adds to the company. Last year's operating results for theresults for the entire company and for its three officers,expressed in millions of U.S. dollars as are follows:
Worldwide Europe Americas Asia
Cost of Capital 9% 10% 8% 12%
Total Assets $210 $70 $70 $70
Current Liabilities $80 $10 $40 $30
After-tax operating income $15 $5 $5 $5
1. Compute the economic value for each office worldwide. Whatfactors affect each office's economic value added? How can anoffice improve its economic value added?
2. If manager's bonuses are based on economic value added to officeperformance, what specific action will managers be movitated totake?
3. Is economic value added the only performance measure needed toevaluate investment centers adequately? Explain your response.