Question
Center Media is made up of 3 divisions that operate as investment centers: Entertainment (DI), Telecommunications (TC) and Publication (PU). The DI division is the
Center Media is made up of 3 divisions that operate as investment centers: Entertainment (DI), Telecommunications (TC) and Publication (PU). The DI division is the oldest of the divisions and consists mainly of a chain of newspapers, television and radio stations. The other two investment centers have been bought from other companies over the past five years. The TC division offers a low-cost long-distance calling service while the PU division manufactures photocopiers and printers. Table 1 contains information for 2016, which is the most recent fiscal year for Center Mdia.
Table 1
Centre Mdia
Data for the year 2019 (in thousands of $)
Entertainment | Telecommunications | Publications | |
sales | 120 000 $ | 200 000 $ | 160 000 $ |
Invested capital (total assets)
| 30 000 | 100 000 | 40 000 |
Net profit | 6 000 | 18 000 | 3 600 |
Cost of capital required | 15% | 18% | 12% |
Questions to answer
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Calculate the ROI (return on invested capital) for each of the investment centers in 2019.
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Calculate the RNR (residual net income, also called residual profit) for each of the investment centers in 2019.
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Suppose each investment center receives an investment opportunity that would generate an 18% return in 2019 on an investment of $ 10 million. If managers are evaluated and rewarded based on ROI, which one or which of them should accept the opportunity in question?
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Suppose each investment center receives an investment opportunity that would generate a 2020 return of 18% on an investment of $ 10 million. If managers are evaluated and rewarded based on NRR (Residual Net Income), which one or which of them should accept the opportunity in question?
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Is it fair and equitable to impose different costs of capital on different centers of investment? Comment.
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