Name: Nurul Sari

NIM: 1101002048

Case 7.1 ; 7.2 ; 7.7

Case 7.1 : Investment center Problems (A)

The ABC Company has three division (A,B,C). Division A eclusively a marketing division. Division

B exclusively a manufacturing division and Division C is both a manufacturing aand marketing

division. The following are the financial facts for each of these divisions:

Assume that the ABC Company depreciates fixed assets on a SLM over 10 years. To maintain its

market and productive facilities, it has to invest $100,000 per year in market development in

Division A and $50,000 per year in Division C. This is written off as an expense. It also has to

replace 10% of its productive facilities each year. Under this equilibrium conditions, what are

the annual rates of return earned by each of the division?

Answer:

Case 7.2 : Investment Center Problems (B)

Current AssetsFixed Assets

Current AssetsFixed Assets

Division ACurrent Assets $ 100,000 Fixed Assets $ - Total Assets $ 100,000

Name: Nurul Sari

NIM: 1101002048

Case 7.1 ; 7.2 ; 7.7

The Complete Office Company depreciates all of its fixed assets over 10 years on SLM, and its

calculates ROA on beginning of year gross book value of assets. The operating expense for each

division (besides depreciation on fixed assets) are $200,000 for Layout and Marketing, $100,000

for Office Furniture, and $150,000 for Office Supplies. Please compute a ROA figure for each

divisions for 1997

Answer:

Case 7.7 : Marden Company

Recommended the best way of measuring the performance of the division manager. If you

need additional information, make the assumption you believe to be most reasonable.

Less: Mrket Development Cost

Net ProfitTotal Assets

Division ACurrent Assets $ 100,000

Name: Nurul Sari

NIM: 1101002048

Case 7.1 ; 7.2 ; 7.7

Answer:

There are many methods to evaluate the performance of each division. We can use profitability ratios,

liquidity ratio and debt ratio and so on to do the measurement. Just like many big company in the world,

ROI, the indicator of money gained or lost on an investment relative to the amount of money invested,

is the most popular way to do the measurement. However, in my opinion, EVA or RI should be a better

method to evaluate the performance of each division separately. Let use EVA to explain the reason of

EVA being a better approach.

EVA is net operating profit after taxes less the money cost of capital. If the company uses ROI to

measure the performance, it cannot maximize the shareholder’s value. When there is a project which

will increase the value of the company but will decrease the ROI result, the manager will cancel it. But if

we use EVA method, we just need to calculate the capital cost rate. In addition, each investment has

different capital cost. EVA method can use different interest rate for each investment. The most

Total $ 1,200,000

Name: Nurul Sari

NIM: 1101002048

Case 7.1 ; 7.2 ; 7.7important reason is it can encourage division managers to do their best to add value for the whole

company.

After all, when the top manager measures the performance for each division, he should consider not

only the value added for each department because of the different size, but also the trend of weight for

total value added.