Question: Kappa Company has three divisions: A, B,
Kappa Company has three divisions: A, B, and C. Each year the vice-president incharge of the best-performing division is entitled to a sizeable bonus. The results for the year are now in and each vice-president has claimed that the bonus should be his or hers. They've each used some version of return on investment (ROI) or residual income (RI) and have based their calculations on either the net book value, defined as original/historical cost less accumulated depreciation, or the gross book value (GBV), defined as original/historical cost without any depreciation of the asset base. Discuss the impact of ROI and residual income on manager performance. The vice-presidents based their claims on the following information: 
All divisions have fixed assets with a 20-year useful life and no disposal value. The fixed assets were purchased 10 years ago. Kappa's cost of capital is 10%. The company's three divisions all use beginning-of-the-year values for invested capital in the ROI or RI calculation. Assume straight-line depreciation. Instructions Determine which method for evaluating performance each vice-president used in order to show that his or her division had the best performance.
Transcribed Image Text:
Division GBV at Start of Year Controllable Income $400,000 $47,500 B 380,000 46,000 250,000 30,800
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