Sarasota Corporation operates three divisions—Archer, Barrett, and Corvell. Divi

Question

Sarasota Corporation operates three divisions—Archer, Barrett, and Corvell. Division managers are evaluated based on the division’s return on investment, and historically, the Corvell division has consistently outperformed the other two divisions. Sarasota’s senior management team has recently discovered that the Corvell Division manager has chosen not to invest in projects that would have been beneficial to the organization as a whole, and they are concerned that the current practice of evaluating the division managers’ performance using return on investment may have contributed to these decisions. Therefore, the senior management team is considering the use of residual income or EVA to evaluate the division managers’ performance. The following data is taken from the most recent year of operations.

Archer Barrett Corvell
Assets $29,999,000 $19,952,000 $7,992,000
Current liabilities 2,254,100 751,000 334,300
Operating income 4,199,860 3,391,840 1,598,400
Minimum rate of return 13% 13% 13%
Weighted average cost of capital 8% 8% 8%
Tax rate 30% 30% 30%

(a)

Calculate the return on investment, residual income, and EVA for each division. (Round ROI answers to 0 decimal places, e.g. 15% and all other answers to 0 decimal places, e.g. 5,215. If the amount is negative then enter with a negative sign preceding the number, e.g. -5,125 or parentheses, e.g. (5,125).)

Return on Investment
Archer
%
Barrett
%
Corvell
%

Residual Income
Archer $
Barrett $
Corvell $

EVA
Archer $
Barrett $
Corvell $

Explanation / Answer

a) Return on investment

b) Residual income

Residual income = operaitng income - desired income

Desired income = minimum required rate of return * operating assets

c) EVA
EVA = NOPAT - (capital invested * wacc)

Archer Barrett Corvell Operating income $41,99,860 $33,91,840 $15,98,400 Assets $2,99,99,000 $1,99,52,000 $79,92,000 Current liabilities $22,54,100 $7,51,000 $3,34,300 Invested capital $2,77,44,900 $1,92,01,000 $76,57,700 Return on investment 15% 18% 21%

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