Apple Farm operates organic produce farms in Oregon and Washington. Apple farn currently evaluates division managers based on return on investment (ROI), but the company is considering changing their performance evaluation system to an EVA approach. Data for 2020 are as follows:

to an EVA approach. Data for 2020 are as follows:

	Oregon Farm	Washington Farm	Total
Revenues	$3,900,000	$3,130,000	$7,030,000
Leasing and other costs	2,300,000	1,655,000	3,955,000
Advertising costs	575,000	830,000	1,405,000
Operating income	1,025,000	645,000	1,670,000
Interest and taxes	462,600	437,000	899,600
Net income	562,400	208,000	770,400
Net book value at 2022 year-end:
Current assets	$1,280,000	$600,000	$1,880,000
Long-term assets	5,375,000	6,535,000	11,910,000
Total assets	6,655,000	7,135,000	13,790,000
Current liabilities	$330,000	$84,000	$414,000
Long-term debt	4,600,000	5,500,000	10,100,000
Stockholders' equity	1,725,000	1,551,000	3,276,000
Total liabilities and equity	6,655,000	7,135,000	13,790,000
WACC			9.5%
Accumulated depreciation	$2,220,000	$220,000

• Apple farms pays a 20% tax rate on net operating profits after deducting interest expense.
• Apple farms believes that advertising provides benefits over 2 years and therefore for EVA purposes should be amortized on a straight-line basis over a 2-year useful life (beginning with the year of the expenditure). Advertising for 2020 is shown in the table above. Advertising for 2019 for the Oregon and Washington farms was $550,000, and $450,000, respectively.

Required:

1. For each of the farms, calculate 2022 ROI using operating income as the numerator measure of income and total assets as the denominator measure of investment.

1. Suppose that Apple Farms is considering adding new tractors from John Deer. For each farm, the new tractors would cost $425,000 and would be expected to result in an incremental increase in operating income of $60,000.
   1. What is the incremental ROI and what effect would the addition of the tractors at the Oregon farm have had on 2020 ROI for Oregon? If performance evaluation is based on ROI, would the Oregon farm manager have an incentive to accept or reject this project? Explain
   2. What is the incremental ROI and what effect would the addition of the tractors at the Washington farm have had on 2020 ROI for Washington? If performance evaluation is based on ROI, would the Washington farm manager have an incentive to accept or reject this project? Explain
2. Assume Apple farms did not add the tractors from part 2. Calculate 2020 EVA for each of the farms.
3. Refer back to the information and assumptions about adding the tractors in part 2. For each farm, explain whether the manager has an incentive to add the new tractors if they are evaluated based on EVA instead of ROI. Assume that the managers receive incentive compensation equal to 10% of EVA.

1. The management team at Apple farms has asked for your recommendation about whether they should continue to use ROI for performance evaluation or if they should shift their focus to EVA. Provide one advantage and one disadvantage to making the switch, and an overall recommendation.