• This question requires the ability to identify, explore, and prioritize and also envision ways to address ongoing risks and
opportunities.
See Appendix 1A for more information about identifying, exploring, prioritizing, and envisioning skills.
SELF–STUDY PROBLEMS
Q4
Self–Study Problem 1 ROI, Residual Income, EVA
Outdoor Express is a large manufacturer of recreational equipment. Performance of the Camping division is measured as an investment
center because the managers make all decisions about investments in operating equipment and space. Following is financial information for
the Camping division:
Average operating assets $2,000,000
Current liabilities 500,000
Operating income 300,000
Camping division’s required rate of return is 12%, but Outdoor Express’s weighted average cost of capital is 9%, and the tax rate is 30%.
REQUIRED:
• A. Calculate return on investment for the Camping division.
• B. Calculate residual income for the Camping division.
• C. Calculate EVA for the Camping division.
• D. Briefly discuss the advantages and disadvantages of each method.
