Problem 12-18 (Part Level Submission) Top management of the Gates Corporation is

Question

Problem 12-18 (Part Level Submission)

Top management of the Gates Corporation is trying to construct a performance evaluation system to use to evaluate each of its three divisions. This past year’s financial data are as follows:

a. How would the divisions be ranked if the evaluation were based on net income?

b.How would the divisions be ranked if the evaluation were based on ROI? (Round answers to 2 decimal places, e.g. 15.25%.)

c.  How would the divisions be ranked (from best to worst performance) if the evaluation were based on residual income? (Round calculations and final answer to 0 decimal places, e.g. 5,025.)

Residual Income Rank
Division A $ _________ _______
Division B $ _________ ________
Division C $ _________ ________

Division A Division B Division C Total assets $942,000 $18,710,000 $11,150,000 Noninterest-bearing current liabilities 50,700 2,160,000 1,067,000 Net income 197,000 1,818,000 1,343,000 Interest expense 50,700 1,934,000 1,248,000 Tax rate 40% 40% 40% Required rate of return 10% 12% 14%

Explanation / Answer

a. How would the divisions be ranked if the evaluation were based on net income? Division A Division B DivisionC Net Income 197000 1818000 1343000 Ranking 3 1 2 b.How would the divisions be ranked if the evaluation were based on ROI? (Round answers to 2 decimal places, e.g. 15.25%.) Division A Division B DivisionC Net Income 197000 1818000 1343000 Interest Expense 50700 1934000 1248000 Tax Rate 40% 40% 40% Net Interest Expense After Tax 30420 1160400 748800 Net Operating Profit After Tax(NOPAT) 81120 3094400 1996800 (Net Income+(Interest Expense-Tax Saving) Total Assets 942000 18710000 11150000 Non Interest bearing Liabilities 50700 2160000 1067000 Invested Capital 891300 16550000 10083000 ROI= Net Operating Income After Tax/Invested Capital*100 9.1013127 18.697281 19.80363 Ranking 3 2 1 c.  How would the divisions be ranked (from best to worst performance) if the evaluation were based on residual income? (Round calculations and final answer to 0 decimal places, e.g. 5,025.) Division A Division B DivisionC NOPAT 81120 3094400 1996800 Invested Capital 891300 16550000 10083000 Required Rate of Return 10% 12% 14% Required Rate of Return on Invested Capital 89130 1986000 1411620 Residual Income=NOPAT-(Invested Capital*Required Return) -8010 1108400 585180 Ranking 3 1 2

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