Angler Fisheries operates a chain of budget seafood restaurants, as well as its own fishing fleet, which operates off the south coast of Australia. Angler is structured into three divisions: the Northern Australian Division and the Southern Australian Division, which manage the restaurants, and the Fishing Fleet Division. Each division operates as a separate stand-alone business, and is designated as an investment centre.
The company uses return on investment to evaluate the performance of each division. For the purposes of calculating divisional ROI, investment capital is defined as total assets less current liabilities, and divisional operating profit after tax is used. Each division is required to achieve an ROI of at least 10 per cent after tax. To calculate divisional EVA, the weighted average cost of capital of 8 per cent is used. The company income tax rate is 30 per cent.
The data relate to financial performance for the last year.
Two years ago, the Fishing Fleet Division replaced most of its fleet. The Southern Australian Division is the oldest division and owns all of its assets, while the Northern Australian Division leases most of its restaurant sites. The lease payments are treated as an expense.
1. Calculate the return on investment for each division for last year.
2. Which division has the best performance? Is there any other information in the case that needs to be taken into account when interpreting divisional performance using ROI?
3. Calculate the EVA for each division for last year.
4. Compare the financial performance of each division using both ROI and EVA.
5. Would you recommend any adjustments to the divisional accounting data, to provide figures for ROI and VA that can be more readily compared?