When measuring profit and invested capital, managers have to decide how they will define what will be included in invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an example, the three definitions of invested capital that can be applied.

Exhibit 13.1 shows that the Smelting business had balances at the end of the financial year of $185 million in current assets; $700 million in non-current assets such as plant and equipment; and $15 million tied up in a plant under construction. In addition, the balance of current liabilities was $110 million.
There are several ways of defining 'invested capital':
Total assets. This measure of invested capital is appropriate if the investment centre manager is responsible for decisions about all of the assets of the investment centre, including non-productive assets.
Total productive assets. In some companies, investment centre managers may be directed by corporate management to retain non-productive assets such as vacant land or construction in progress. In such cases it is appropriate to exclude these non-productive assets from the measure of invested capital. Under this alternative, $885 million would have been used in the ROI and residual income calculations (total assets of $900 million less $15 million for the plant under construction).
Total assets less current liabilities. In some companies, managers in investment centres manage certain short-term liabilities, including short-term bank loans and employee entitlements such as the provision for long-service leave. In these cases, invested capital can be measured as total assets less current liabilities. This approach encourages the managers to minimise resources tied up in assets and to manage the use of short-term credit to finance operations. If this approach had been used by the Smelting business, the invested capital would have been $790 million (total assets of $900 million less current liabilities of $110 million).