• Define the return on capital employed (ROCE)

  
  
• Define the cost of capital as the weighted average of the costs of the different financing instruments used to finance the investment.
  
  
• EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)

When a company or a division has a negative EVA , it means that

• The firm or division has made poor investments in the past
  
  
• The capital invested in the division was mis-measured (over estimated)
  
  
• The operating income was under estimated
  
  
• The firm or division is at an early stage in the life cycle and has not hit its peak earning stages yet
  
  
  • All of the above
    
  • Any of the above
    
  
  
  
• Assuming that a division has a negative EVA because of poor investments in the past, the right action to take is
  
  
  • Shut it down or liquidate it
    
  • Sell it
    
  • Continue in operations
    

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