Question
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual reports from two
Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual reports from two of Baileys divisions is shown provided below. The companys weighted-average cost of capital is 11 percent. Division A Division B Total assets $ 6,040,000 $ 8,710,000 Current liabilities $ 500,000 $ 1,750,000 After-tax operating income $ 1,000,000 $ 1,156,200 ROI 25 % 16 % a. Based on ROI, Division A generates more profit per dollar of invested capital than Division 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 her investment base by $250,000 and increase her divisional operating income by $30,000. Would she be motivated to invest in this project?
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