CHATPER 11

Question 1

ROI - Calculation

Answer 1

• OP/Investment
• The bigger the better and allows the comparison of large and small divisions b/c is its expressed as a percentage
• To measure the denominator:
• Historical cost v. book value ( historical
cost-depr) or the replacement cost
• The more common value is the book value-
it makes managers less inclined to accept
new technologies

Question 2

ROI - Advantages & Disadvantages

Answer 2

o Advantages
• Standard measure/Universal
o Disadvantages
• Managers may pass up profitable projects to
keep ROI high b/c of incentive system

Question 3

DuPont Analysis (Splitting ROI)

Answer 3

(OP/Inv) = (OP {profit margin}/revenue {cents on every dollar that generate profit})x(revenue {investment turnover}/Investment {how many times you generate invst. Through revenue})

Question 4

Economic Value Added

Answer 4

o Calculation:
• Net Operating Profit After Tax – (WACC *
Investment)
• Weighted Average Cost of Capital Calculation
• (After Tax Cost of DebtMkt Value of Debt) +
(Cost of EquityMarket Value Equity)/ Mkt
Value of Debt+ Mkt Value of Equity

Question 5

EVA- Advantages & Disadvantages

Answer 5

o Advantages – is expressed in a dollar amount vs. a percentage with ROI and Encourages managers to accept all profitable projects.

o Disadvantages- may not be widely accepted as ROI because it is not a standard measure