Which division performs better?

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December 26, 2020
Management.
December 26, 2020

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 95% as 95, not as 0095 and not as 95%)
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 $352 million as 352, 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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