CHEETAH DIVISION

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CHEETAH DIVISION

• Elvira Van
• March 16, 2004

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ROI

• ROI
• Ratio

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Increase in ROI

• Reduce
• Expenses

• Reduce
• Assets

• Increase
• Sales

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ROI in Performance Measurement

• Advantages
• Reflects anything that affects financial
  statements
• Simple to calculate, easy to understand
• ROI for competitors is available
• Disadvantages
• Underinvestment into projects with low ROI
• Disposal of assets ? higher ROI but loss in
  profits
• Subjective setting of required rate of return

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EVA

• EVA
• Dollar amount

EVA Net Profit Capital Charge where Capital
Charge Cost of capital Capital employed
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Increase in EVA

• Increase
• Positive Return Investments

• Increase
• Efficiency

• Withdraw Negative
• Return Investments

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EVA in Performance Measurement

• Allows to invest into all projects that generate
  profit in excess of cost of capital
• Example
• Enables the company to have the same profit
  objective for comparable investments
• Uses different rates for different levels of risk
• Value based performance management
• Cheetah Division

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Example

• Suppose of a division earning currently a ROI of
  30 and suppose that this division faces an
  investment opportunity producing a return of 20
  with COC of 10

  Before Investment Investment After Investment Change
Capital 100 20 120  
Operating profit 30 4 34  
COC 10 10 10  
ROI 30 20 28 -2
EVA 20 2  22 2
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Example
EVA Accept project
ROI Reject project

• In this case decreasing ROI is good for the
  shareholders, thus ROI should not be maximized
  and therefore it is problematic controlling tool

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Cheetah Division

• Uses ROI
• Ex Parts ordering size cost saving- cost of
  carrying additional inventory
• Uses purchase price as inventory cost
• Requires 40 ROI on all investments

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Discussion Topics

• Team 1 Cheetah Division Team
• Why 40 ROI makes sense?
• Why 100 purchase value is used?
• Why 40 ROI is required for warehouse investment?
• What are Cheetahs suggestions to IMC?

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Discussion Topics

• Team 2 Operations Research Team
• Why 20 makes sense?
• Why 60 of the purchase price should be used?
• What changes in performance measurement are
  suggested?
• Should Cheetah use the same cost of capital for
  all kinds of investment?

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Discussion Topics

• Team 3 Delta Division Group
• Why does it accept the 10 of operating cost but
  not the investment return of 40?
• What is reasonable rate? Why?

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Class Division

• Team 1 Amy, Bea, Darnell, Jeff
• Team 2 George, Jessica, Joyce, Ken
• Team 3 David, Lisa, Yasuyuki

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Takeaways

• ROI prevents the company from investing into
  assets with lower ROI ? not enough inventory
• Solution different required ROI for inventory
• Usage of EVA is necessary to evaluate projects
  with different levels of risk
• Example inventory vs. fixed assets

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Takeaways

• Different ROI should be used for different
  investments and divisions
• Warehouse problem
• Solution
• return on warehouse investment for Delta
  should reflect the best alternative- market
  rental
• Exclusion of the warehouse for Delta from
  investment base of Cheetah could be a solution

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• Thank you for your participation!