Question
Division A has reported a net profit after tax of RM9,000,000 for the year ended 31 December 2019. Included in the costs used to calculate
Division A has reported a net profit after tax of RM9,000,000 for the year ended 31 December 2019. Included in the costs used to calculate this profit are the following items: Research and development costs of RM6,000,000 for a new product that is expected to last for the current year and two further years; Depreciation of non-current assets at 20% per year. The non-current assets invested in Division A shows a historical value of RM32,000,000. However, a note to the accounts shows that the replacement cost of these assets at the beginning of the year is RM35,000,000. The Division has a working capital of RM5,000,000, and a cost of capital of 12% per year. Required: (a) Calculate for the division the return on capital employed (ROI) and economic valued- added (EVA) measures for the year ended 31 December 2019. Based on your computations, conclude whether the division has achieved a good level of performance. (13 marks) (b) Compare the above measurements, discussing both, why EVA is a better performance measurement, while ROI is viewed to be a more useful performance measurement. (Note: no calculations required). (6 marks) (c) Discuss briefly whether further measures are needed for the effective appraisal of divisional management performance. (6 marks) Total: 25 Marks]
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