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Problem 1 Media Company provides education and training services and operates three divisions - Print, Industrial and E-Services Division managers are evaluated based on the
Problem 1 Media Company provides education and training services and operates three divisions - Print, Industrial and E-Services Division managers are evaluated based on the division's return on investment, and historically, the E-Services division has consistently outperformed the other two divisions. Media's senior management team has recently discovered that the E- Services Division manager has chosen not to invest in projects that would have been beneficial to the organization as a whole, and they are concerned that the current practice of evaluation the division managers' performance using return on investment may have contributed to these decisions. Therefore, the senior management team is considering the use of residual income or EVA to evaluate the division managers' performance. The following data is taken from the most recent year of operations Assets Current liabilities Operating Income Minimum rate of return Weighted Average Cost of Capital Tax Rate Print Industrial E-Services S30,000,000 S20,000,000 S8,000,000 4,500,000 750,000 325,000 4,200,000 3,400,000 1,520,000 14% 14% 8% 30% 14% 8% 30% 30% Required: 1. Calculate the return on investment, residual income, and EVA for each division 2. Comment on the expected results of switching performance evaluation method to either residual income or EVA. More specifically, is one better than the other and why? Should the switch be made? Why or why not? (Hint: think about how similar and different the divisions are in areas such as size, what they do, etc.)
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