CLOC, an international company, produces and sells children€™s watches in Canada and Taiwan. Each division operates as an investment centre. The divisions€™ financial information is shown below:

 

CLOC evaluates its divisional managers€™ performance based on ROI and EVA. The divisional managers will receive a bonus equal to10% of the division€™s ROI, as long as the division has a 30% ROI and a positive EVA.

Required:

A. Calculate each division€™s ROI

B. Calculate each division€™s RI. 

C. Calculate each division€™s EVA.

D. CLOC has an opportunity for the divisions to invest in a project costing $500,000 that would generate annual revenue of $700,000 and operating expenses of $520,000.Would the divisional manager be likely to proceed with this investment opportunity, if his/her bonus is equal to 10% of the division€™s ROI? Support your answer by calculating the new ROI and EVA, including the new investment.

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Taiwan Canada $2,500,000 $1,500,000 Total Assets 300,000 Current Liabilities 120,000 Net operating income 875,000 600,000 Required Rate of Return 7% 9% Debt: Equity 1:1 2:3 Cost of Debt 6% 8% Cost of Equity 10% 11% Tax rate 30% 25%