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 12 percent.
| Division A | Division B | ||||||
| Total assets | $ | 6,300,000 | $ | 8,450,000 | |||
| Current liabilities | $ | 750,000 | $ | 1,900,000 | |||
| After-tax operating income | $ | 1,100,000 | $ | 1,220,000 | |||
| ROI | 22 | % | 13 | % | |||
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 $200,000 and increase her divisional operating income by $36,000. Would she be motivated to invest in this project?
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