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Which division is more profitable? Would EVA more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations.

05 / 03 / 2018 Assignment

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ROI versus EVA Measures

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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