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?