ROI, Residual Income, and EVA with Different Bases

Envision Company has a target return on capital of $10\%.$ In evaluating operations, management looks at book values $($GAAP compliant$)$ and current values. Current values reflect management$$s estimates of asset values. The following financial information is available for October $($$ thousands$)$:

Software Division Consulting Division Venture Capital Division

$($Value Base$)($Value Base$)($Value Base$)$

Book Current Book Current Book Current

Sales $$200,000$ $$200,000$ $$450,000$ $$450,000$ $$625,000$ $$625,000$

Pretax income $35,00037,20037,00038,50063,00043,200$

Operating assets $250,000310,000185,000175,000700,000720,000$

Current liabilities $30,00030,00020,00020,00065,00065,000$

Required

a$.$ Compute the return on investment using both book and current values for each division. $($Round answers to three decimal places.$)$ For ROI calculations, Envision uses operating assets as the investment base.

Book Value Current Value

Software Answer

Answer

Consulting Answer

Answer

Venture Capital Answer

Answer

b$.$ Compute the residual income for both book and current values for each division.

Note: Use a negative sign with answers, when appropriate.

Book Value Current Value

Software Answer

Answer

Consulting Answer

Answer

Venture Capital Answer

Answer

c$.$ Compute the economic value added income for both book and current values for each division if the tax rate is $20$ percent and the weighted average cost of capital is $8$ percent.

Note: Use a negative sign with answers, when appropriate.

Book Value Current Value

Software Answer

Answer

Consulting Answer

Answer

Venture Capital Answer

Answer