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 below. The company’s
weighted-average cost of capital is 12 percent.
Division A Division B
Total Assets $6,000,000 $8,750,000
Current Liabilities 500,000 1,750,000
After-Tax Operating Income 1,000,000 1,180,000
ROI 25% 14%
a. Which division is more profitable?
b. Would EVA more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations.
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
$37,500. Would the manager choose to invest in the new project?
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