Seattle Aviation evaluates the performance of its two division managers using an ROI formula. For the forthcoming period, divisional estimates of relevant measures are

PLEASURE COMMERCIAL TOTAL COMPANY

Sales $24,000,000 $96,000,000 $120,000,000

Expenses 21,600,000 84,000,000 105,600,000

Divisional assets 20,000,000 60,000,000 80,000,000

The managers of both operating divisions have the autonomy to make decisions regarding new investments. The manager of Pleasure Crafts is contemplating an investment in an additional asset that would generate an ROI of 14 percent, and the manager of Commercial Crafts is considering an investment in an additional asset that would generate an ROI of 18 percent.

REQUIRED

1. Compute the projected ROI for each division disregarding the contemplated new investments.

2. Based on your answer in part a, which of the managers is likely to actually invest in the additional assets under consideration?

3. Are the outcomes of the investment decisions in part b likely to be consistent with overall corporate goals? Explain.

4. If the company evaluated the division managers' performances using a residual income measure with a target return of 17 percent, would the outcomes of the investment decisions be different from those described in part b? Explain. (2pts)

5. The CFO of General Motors was once quoted as saying:

ROA was a logical next step because all those other measures generally have focused on the income statement. Moving to ROA means that we are going to focus not only on the income statement, but on the balance sheet and effective utilization of the assets and liabilities that are on the balance sheet as well. ROA is a better measure for us than EVA...EVA is simpler conceptually, because it automatically builds on growth, whereas with this approach we know that we've got to have growth as an overlying objective ..... EVA is more comprehensive. And that has a certain appeal to me. But, given our situation, particularly in our North American operations, it just would not have been the right measure. ROA works for us and EVA does not because our operations have to deal with those two different kinds of starting points. Within GM, in our North American operations, you've got a classic turnaround situation, and in our international operations, you've got a classic growth situation. You can apply ROA to both; you can't apply EVA to both. Do you agree with this reasoning? Why or Why not?