Question

Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown as follows. The company’s weighted-average cost of capital is 10 percent.

	Division A				Division B
Total assets	$	6,080,000			$	8,670,000
Current liabilities	$	550,000			$	1,750,000
After-tax operating income	$	1,020,000			$	1,159,000
ROI		24	%			12	%

a. Which division is more profitable in absolute dollars?

b. Compute the EVA for Division A and Division B.

c. Suppose the manager of Division A was offered a one-year project that would increase his investment base by $250,000 and show a profit of $27,500. Would the manager be motivated to invest in the new project?

Answer 1