Sheffield Corporation operates three divisions—Archer, Barrett, and Corvell. Div

Question

Sheffield 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. Sheffield’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.

Tax rate

(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).)

30%

30%

30%

Archer Barrett Corvell Assets $29,957,000 $19,969,000 $7,995,500 Current liabilities 2,250,000 757,000 327,700 Operating income 4,193,980 3,394,730 1,519,145 Minimum rate of return 14% 14% 14% Weighted average cost of capital 8% 8% 8%

Tax rate

(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 $

30%

30%

30%

Explanation / Answer

1.Calucation of ROI :-

ROI = Return on investment / total investment

2. Calculation of residual income :-

Residual income = Division's net operating income - ( Minimum return on assets * Average operating assets of division)

3. Calculation of EVA :-

EVA = Net Operating Profit After Tax - (Capital Invested x WACC)

Divisions Total investment Return on investment ROI Archer 29957000 4193980 14% Barrett 19969000 3394730 17% Corvell 7995500 1519145 19%

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