Hodak - Measuring EP/EVA


	Investments with Lagging Returns
	Companies often find unique opportunities for growth that go beyond the evolutionary development of product adaptation or organic expansion in existing markets. A company might develop new product lines or new productive capacity, or may enter new geographic areas. Such investments often have returns that arise several periods, sometimes years, after To support such opportunities, a company may invest in self-constructed assets. Such an investment won't generate any returns until the assets are brought into service. Thus, under Baseline EP, management might be penalized for building (versus, say, buying or leasing) assets, or may put off investing in a potentially valuable asset. More generally, strategic investments are investments that do not pay off (i.e., become EP positive) within several periods in which the investment is made. This also can create a bias toward disinvestment, as with self-constructed assets, but without even the cushion of CIP accounting. Acquisitions are a common type of strategic investment. Purchased assets should be treated similarly to assets that were developed internally. For example in-process R&D from an acquisition should be treated like internal R&D.