roi ri dupont method investment decisions balanced scorecard 270020

ROI, RI, DuPont method, investment decisions, balanced scorecard. Global Event Group has two major divisions: print and Internet. Summary financial data (in millions) for 2011 and 2012 are as follows:



The two division managers’ annual bonuses are based on division ROI (defined as operating income divided by total assets). If a division reports an increase in ROI from the previous year, its management is automatically eligible for a bonus; however, the management of a division reporting a decline in ROI has to present an explanation to the Global Event Group board and is unlikely to get any bonus. Carol Mays, manager of the print division, is considering a proposal to invest $960 million in a new computerized news reporting and printing system. It is estimated that the new system’s state of the art graphics and ability to quickly incorporate late breaking news into papers will increase 2013 division operating income by $144 million. Global Event Group uses a 12% required rate of return on investment for each division.

Required

1. Use the DuPont method of profitability analysis to explain differences in 2012 ROIs between the two divisions. Use 2012 total assets as the investment base.

2. Why might Mays be less than enthusiastic about accepting the investment proposal for the new system, despite her belief in the benefits of the new technology?

3. Chris Moreno, CEO of Global Event Group, is considering a proposal to base division executive compensation on division RI.

a. Compute the 2012 RI of each division.

b. Would adoption of an RI measure reduce Mays’ reluctance to adopt the new computerized system investment proposal?

4. Moreno is concerned that the focus on annual ROI could have an adverse long run effect on Global Event Group’s customers. What other measurements, if any, do you recommend that Moreno use? Explainbriefly.