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Problem1: Media Company provides education and training servicesand operates three divisions- Print, Industrial and E-Services. Division managers are evaluated based on the division's return on
Problem1: Media Company provides education and training servicesand 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 othertwo divisions. Media's senior managementteam has recently discovered that the E-Services Division managerhas 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 recentyear of operations. Print Industrial E-Services Assets Current liabilities Operating Income Minimum rate of return Weighted Average Cost of Capital Tax Rate $30,000,000 4,500,000 4,200,000 14% 8% 30% $20,000,000 750,000 3,400,000 14% 8% 30% $8,000,000 325,000 1,520,000 14% 8% 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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