Question 1(performance evaluation: RI, ROI)
Generic Motors Corporation has two divisions, Kadillack and Chevrolay Their performance for last year is as follows
|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
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