Question
Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two
Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown as follows. The companys weighted-average cost of capital is 11 percent.
| Division A | Division B | ||||||
| Total assets | $ | 6,100,000 | $ | 8,650,000 | |||
| Current liabilities | $ | 550,000 | $ | 1,800,000 | |||
| After-tax operating income | $ | 1,020,000 | $ | 1,163,000 | |||
| ROI | 24 | % | 14 | % | |||
a. Which division is more profitable in absolute dollars?
b. Compute the EVA for Division A and Division B.
c. Suppose the manager of Division A was offered a one-year project that would increase his investment base by $250,000 and show a profit of $32,500. Would the manager be motivated to invest in the new project?
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Financial Accounting
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann
3rd edition
9780077506902, 78025540, 77506901, 978-0078025549
