Generic Motors Corporation has two divisions, Kadillack and Chevrolay. Their performance for last year is as follows.
| Kadillack |
Chevrolay |
| Investment (operating assets) |
$300 million |
$1,200 million |
| Profit |
$45 million |
$150 million |
The required rate of return (cost of capital) for Generic Motors is 10% a year.
Required:
a) What is the return on investment (ROI) for each division?
Kadillack ROI =% (enter say 9.5% as 9.5, not as 0.095 and not as 9.5%)
Chevrolay ROI =%
Which division performs better, based on ROI? (1=Kadillack, 2=Chevrolay)
b) What is the residual income (RI) for each division?
Kadillack RI = $million(enter say $3.52 million as 3.52, not as 3,520,000)
Chevrolay RI = $million
Which division performs better, based on RI? (1=Kadillack, 2=Chevrolay)
c) Which of the two measures (ROI or RI) would you use to decide which division performs better? Briefly explain your reasons.