B3-M5 Performance Management 2

Question 1

what is ROI formula?

Answer 1

ROI = Net Income / Avg. investment capital

ROI = Profit margin x Investment turnover

Question 2

what is RI formula?

Answer 2

RI = income - (investment capital x hurdle rate)

• Hurdle rate is imputed interest
• RI is defined as income/profitability in excess of desired minimum return/target rate of return

Question 3

what is ROA formula?

Answer 3

ROA = Net income / Avg. total assets

Question 4

what factor is the most criticized in ROI?

Answer 4

Shareholders’ equity because the effects of operating decisions made at another organization level

Question 5

what is the primary disadvantage of using ROI rather than RI to evaluate performance of investment center managers?

Answer 5

ROI may lead to reject projects that yield positive cash flows for the company as a whole in a long run

Question 6

what is ROE formula?

Answer 6

ROE = Net income / Equity

Question 7

what is economic value added and its formula?

Answer 7

it is firm’s or investment center’s net operating profit after taxes (NOPAT) LESS its required return

• NOPAT = EBIT x (1-taxes)
• RR = total assets/or investment x cost of capital/ or WACC