ROI and EVA. Minnesota, Inc., has the following data available for two of its divisions for last year:
| |
Division X |
Division Z |
|
Sales
|
$200,000
|
$500,000
|
|
Contribution Margin
|
80,000
|
220,000
|
|
Operating Income.
|
50,000
|
90,000
|
|
Average Operating Assets
|
180,000
|
360,000
|
|
Average Current Liabilities
|
30,000
|
50,000
|
|
Weighted Average Cost of Capital
|
12%
|
12%
|
The tax rate for Minnesota, Inc., is 40 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 Division X 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 Division X 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?