Oriole Corporation recently announced a bonus plan to reward the manager of its

Question

Oriole Corporation recently announced a bonus plan to reward the manager of its most profitable division. The three divisional managers are to decide which performance measure will be used to evaluate profitability. Oriole Corporation requires a 10% minimum return on investment The following information is available for the year just ended. Gross Divisional Book Value Operating Division of Assets Ashton Drye Poole Income $800,000 749,400 450,000 $94,490 91,480 58,100 (a) Calculate return on investment. (Round ROI to 2 decimal places, eg. 5.1296.) Return on Investment Ashton Drye Poole Which division performed the best?

Explanation / Answer

1. return on investment = operating income / book value of asset  

POOLE divison performs best with highest roi.

2. residual income = Minimum return required - return earned

Drye divison has performed best.

3. Economic value added (EVA) = Net operating profit after tax (NOPAT) - (capital invested X WACC)

NOPAT = Operating profit X (1-TAX)

Calculation of NOPAT

Calculation of (Capital invested X WACC)

Calculation of EVA

DRYE divison has performed best with highest EVA .

Divison B.V. of asset(A) Operating income(B) ROI(B/A) ASHTON 800000 94490 11.811% DRYE 749400 91480 12.207% POOLE 450000 58100 12.911%

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