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Which division is more profitable

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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 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?

Reference no: EM131739790

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