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ROI and EVA. Saints, Inc., has the following data available for two of its divisions for last year:
Rugby Cricket
$230,000 $520,000
Contribution Margin 90,000 220,000
Operating Income 60,000 90,000
Average Operating Assets 180,000 380,000
Average Current Liabilities 20,000 30,000
Weighted Average Cost of Capital 10% 10%

The tax rate for Saints, Inc., is 30 percent.

a. Compute the following for each division:

1. Sales margin

2. ROI

3. EVA

b. Briefly discuss which division appears most successful and why.

c. Assume a prospective project for the Rugby Division has operating income of  $10,000, average operating assets of $60,000, average current liabilities of $4,000, and has a positive net present value. Assume the manager of this division is evaluated based on ROI for merit pay and promotion. Would that manager want to go ahead with this prospective project? Would your answer change if the manager were evaluated based on EVA? If so, how and why would your answer change?

 

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  • Category:- Accounting Basics
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