Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual reports from two of Bailey’s divisions is shown provided below. The company’s weighted-average cost of capital is 12 percent.

a. Based on ROI, Division A generates more profit per dollar of invested capital than Division B. Would EVA more clearly show the relative contribution of the two divisions to the company as a whole? Show your computations.
b. Suppose the manager of Division A was offered a one-year project that would increase her investment base by $500,000 and increase her divisional operating income by $90,000. Would she be motivated to invest in this project?

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Total assets Current liabilities.... After-tax operating income ROI ... Division A Division B $7,200,000 $9,275,000 600,000 1,850,000 1,200,000 1,299,000 25% 14%