Question

Consider the following data, which relate to the two divisions of Oak Ridge Products:

		Division 1		Division 2
Total assets		$68,300,000		$23,100,000
Noninterest-bearing current liabilities		4,490,000		2,400,000
NOPAT		11,200,000		5,900,000
Required rate of return		11%		10%

Compare the two divisions in terms of return on investment and residual income. In the past year, which division has created the most wealth for Oak Ridge shareholders? (Round ROI to 2 decimal place, e.g. 15.25%. Enter negative answers preceding either - sign, e.g. -45 or in parentheses, e.g. (45).)

		Division 1		Division 2
ROI		%		%
Residual income/EVA

Answer 1

PARTICULAR	DIVISION A	DIVISON B
TOTAL ASSETS	68,300,000	23,100,000
NON INTEREST BEARING CURRENT LIABILITIES	4,490,000	2,400,000
NOPAT	11,200,000	5,900,000
REQUIRED RATE OF RETURN	11%	10%
INVESMENT = TOTAL ASSETS - CURRENT LIABILIIES	63,810,000	20,700,000
ROI = NOPAT/INVESTMENT	17.55%	28.5%
RESIDUAL INCOME
Required Return	7,019,100	2,070,000
Actual Return	11,200,000	5,900,000
RESIDUAL INCOME/EVA	4,180,900	3,830,000
	DIVISION A	DIVISION B
ROI	17.55%	28.5%
RESIDUAL INCOME/EVA	4180900	3830000

CONCLUSION
ROI	DIVISION B HAS BETTER ROI
RESIDUAL INCOME/EVA	DIVISION A HAS BETTER RESIDUAL INCOME