Sevilla Consulting offers environmental consulting services worldwide. The managers of branch offices are rewarded for superior performance with bonuses based on the economic value that the office adds to the company. Last year's operating results for the results 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. What factors affect each office's economic value added? How can an office improve its economic value added?
2. If manager's bonuses are based on economic value added to office performance, what specific action will managers be movitated to take?
3. Is economic value added the only performance measure needed to evaluate investment centers adequately? Explain your response.