# Acc 400 Week 5 Textbook

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Week 5 Assignment from the textbook
Nancy Schwartz
ACC/400
February 22, 2016
Lee Kroll
E25.4
Sapsora Company uses ROI to measure the performance of its operating divisions and to reward division managers. A summary of the annual reports from two divisions is shown below. The company’s weighted-average cost of capital is 12 percent.

Note: Economic Value Added (EVA) (p. 1087) A specific type of residual income that is computed by multiplying the after-tax weighted average cost of capital by total assets minus current liabilities and subtracting that product from the after-tax operating income.
-------------------------------------------------
Division A Division B

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$6,000,000 \$8,750,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 1,750,000
After-tax operating income . . . . . . . . . . . . . . . . . . 1,000,000 1,180,000
ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25% 14%

a. Which division is more profitable? Division A

b. Would EVA (Economic Value Added) more clearly show the relative contribution of the two divisions to the company as a whole? Show the computations.

EVA = After-Tax Operating Income – {Division’s Total – Division’s Current} x Weighted- Assets Liabilities Average Cost of Capital

| Division A | Division B | Total Assets | 6,000,000 | 8,750,000 | Current Liability | (500,000) | (1,750,000) | Capital Employed | 5,500,000 | 7,000,000 | Weight-AverageCost of Capital | 12% | 12% | After Tax OperatingIncome | 1,000,000 | 1,180,000 | ROI | 25% | 14% | EVA | 340,000 | 340,000 |

c. Suppose the manager of Division A was offered a one-year project that would increase his investment base by \$250,000 and show a profit of...

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