TECO was found in 1956 as Tong Yuen Electric Company in Taipei, Taiwan.

It started
with the initial capital of 200 thousand US$. And the first product of the TECO was
induction motors. Overtime they expanded to other product lines those where ( IT,
Home automation and Factory automation)
The TECO Management believes that the success of the company was because of
Value added method which was used to evaluate the performance of the company
and to distribute bonus to its employees. Management also developed a formula by
which they use to divide the bonus to its employees. But later on some managers
came up with some issues. First one was related to the calculation of value added
second issue was related to corporate value added and Third was related lower level
employees,if they understand Value added system.

ECONOMIC VALUE ADDED

A measure of a company's financial performance based on the residual wealth

calculated by deducting cost of capital from its operating profit (adjusted for taxes on a
cash basis)
EVA=Net Operating Profit after Taxes (NOPAT) - (Capital * Cost of Capital)
CASH VALUE ADDED
A measure of the amount of cash generated by a company through its operations. It is

computed by subtracting the 'operating cash flow demand' from the 'operating cash flow'
from the cash flow statement.

PROS
Possible to estimate companys return to stakeholders
EVA is a form of residual income so its a measure of how much value a
company has created. EVA would require the TECO Management to
provide a return above what investors expect to receive. Since the
company want to keep the shareholders happy they would have to work
on creating a higher EVA which will makes the shareholders happier.
Has effects on all levels of employees
If EVA is implemented in TECO, over time their employees become
acquainted with how the different processes help in value creation. This
will make them realise every decision they take has an effect on the
company so their decisions would be in the best interest of the company,
especially if the bonuses are based on EVA as they can earn a lot.
Ability to monitor performance at divisional level
TECO has been split into three divisional structures Home automation,
Factory automation, Information technology.
Basically these are
functionally different from each other and would have divisional managers
for the same. For example if Home Automation WACC was 10 % and IT
was 20 %. Home Automation had 13 % return and IT has 16 % return,
from this we can understand Home Automation did better than IT in terms
of return. So if its spilt as divisions the managers of Home would receive
bonus and IT cant claim this bonus.

CVA measures how strong the company is in terms of

liquidity
All business need a certain amount of cash flow for its day to day
operations which can be called as required cash flow. Cash Value added
would be the extra cash in excess of the required cash flow. So when the
investors of TECO see how much Cash Value they have they can judge the
liquidity of the company. The higher the CVA it means the better it is for
TECO to take advantage of opportunities.

CONS

EVA is too present minded

If EVA is implemented in TECO its possible that some managers feel
that they can liquidate their assets prematurely in order to receive
benefits from selling parts of the company which may or may not be
beneficial.

Difficulty in Implementing EVA across all levels of employees

If TECO is not able to explain the concept of EVA to all levels of
employees and if it only remains with the higher level of
management, its potential is lost among the lower level of
employees. The capacity of lower level employees should not be
judged and if its well explained it would be in the interest of the
company.

CVA can be a complex concept

To arrive at the cash value involves complex calculations, difficult
adjustments, a great degree in rightly being able to judge and it can
also be hard to interpret the results.