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Problem - 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 company's weighted-average cost of capital is 10 percent.
Division A
Division B
Total assets
$6,380,000
$8,370,000
Current liabilities
$800,000
$1,950,000
After-tax operating income
$1,120,000
$1,204,000
ROI
24%
13%
Required -
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 $350,000 and show a profit of $38,500. Would the manager be motivated to invest in the new project?
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