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ROI and Economic Profit Calculations

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10-A1 ROI and Economic Profit Calculations
Consider the following data (in thousands) :
(see the attached table)

1)For each division, compute the return on sales, the capital turnover, and the return on investment (ROI)
2)Which division is the best performer if evaluation is based on ROI? Explain.
3)Suppose each division is assessed a cost of capital of 10% on invested capital. Compute the economic profit for each division. Which division is the best performer based on economic profit? Explain.

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Solution Summary

Computations illustrated with instructional notes.

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See spreadsheet for schedules illustrating how to analyze the ROI (ROA) and economic profit (residual income) for these three divisions.

1)For each division, compute the return on sales, the capital turnover, ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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