Reference no: EM132325807

Question: Angler Seafood Ltd operates a chain of budget seafood restaurants. Angler is structured into two divisions: the Southern Division and the Northern Division, each operating as a separate stand-alone business and is designated as an investment centre. The weighted average cost of capital, which is also the required rate of return, of Angler Seafood is 8%. The company income tax rate is 30%.

For the purpose of calculating divisional return on investment (ROI) and residual income (RI), invested capital is defined as total assets, and divisional operating profit before tax is used. The Southern Division owns all of its assets, while the Northern Division leases most of its restaurant sites. The lease payments are treated as an expense. The following data relate to financial performance for the last year.

Southern Division Northern Division

Operating profit before tax $54,000 $12,000

Total assets 525,000 60,000

Current liabilities 120,000 30,000

(a) Calculate the return on investment (ROI) for each division.

(b) Compare the performance of the two divisions using ROI. Is there any other information given in the question that needs to be taken into account when interpreting divisional performance using ROI?

(c) Calculate the residual income (RI) for each division. Should RI be used to compare the performance of the two divisions? Why?

(d) Calculate the EVA for each division.

(e) The manager of the Southern Division is considering a proposal to invest $80,000 in a new project, which will generate a profit of $7,600 each year. Is the manager likely to accept the proposal if his bonuses are based on divisional ROI? Would his decision promote goal congruence?