The company has asked you to calculate ROI and economic profit for three divisions. Use an interest rate of 10% when calculating the capital charge.
Consider the following data in thousands.
Hubert: Average invested capital -$2,000. Revenue - $3,600. Income - $180
Duane: Avg. inv. capital - $600. revenue - 1,200. Income - 84.
Louis: Avg. inv. capital - $1800. Revenue - $9000. Income - 216
1. For each division compute the return on sales, the capital turnover and return on investment.
2. Which division is the best performer if evaluation is based on ROI? Explain.
3. Suppose each division is assessed a cost of 10% on invested capital. Compute the economic profit for each division. Which division is the best performer based on ecomonic profit? Explain.
When you have finished the spreadsheet, answer the following questions:
1. Which division has the best performance using ROI method? Using the economic profit method?
2. Which division has the worst performance under both methods?
3. Which method would you suggest for evaluating the manager of each division?