ROI to measure the performance
The Manning Company uses ROI to measure the performance of its operating division. A summary of the annual reports from the two divisions is shown below. The company’s cost of capital is 12%.
Capital invested $2400 $4000
Net income $480 $720
ROI 20% 18%
a. Which division is more profitable?
b. At what cost of capital would the two divisions be
considered equally profitable?
c. What performance measure procedure would more clearly
show the relative profitability of the two divisions?
d. Suppose the manager of Division A were offered a one-year
project that would increase his investment base, for that year, by $1,000 and
show a profit of $150. Would the manager accept this project if he were
evaluated on his divisional ROI? Should he accept this project?
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