Question 1(performance evaluation: RI, ROI)
Generic Motors Corporation has two divisions, Kadillack and Chevrolay. Their performance for last year is as follows.
| Kadillack |
Chevrolay |
| Investment (operating assets) |
$100 million |
$400 million |
| Profit |
$18 million |
$56 million |
The required rate of return (cost of capital) for Generic Motors is 10% a year.
Required:
a) What is the return on investment (ROI) for each division?
Kadillack ROI = 1 % (enter say 9.5% as 9.5, not as 0.095 and not as 9.5%)
Chevrolay ROI = 2 %
Which division performs better, based on ROI? (1=Kadillack, 2=Chevrolay) 3
b) What is the residual income (RI) for each division?
Kadillack RI = $4 million (enter say $3.52 million as 3.52, not as 3,520,000)
Chevrolay RI = $5 million
Which division performs better, based on RI? (1=Kadillack, 2=Chevrolay) 6
c) Which of the two measures (ROI or RI) would you use to decide which division performs better? Briefly explain your reasons.
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