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C HEETAH D IVISION

C HEETAH D IVISION. Elvira & Van March 16, 2004. Asset Turnover. Profit Margin. ROI. ROI Ratio:. Increase in ROI. Reduce Expenses. Reduce Assets. Increase Sales. ROI in Performance Measurement. Advantages Reflects anything that affects financial statements

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C HEETAH D IVISION

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  1. CHEETAH DIVISION Elvira & Van March 16, 2004

  2. Asset Turnover Profit Margin ROI • ROI • Ratio:

  3. Increase in ROI • Reduce • Expenses • Reduce • Assets • Increase • Sales

  4. 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

  5. EVA • EVA • Dollar amount • EVA= Net Profit – Capital Charge • where • Capital Charge = Cost of capital * Capital employed

  6. Increase in EVA • Increase • Positive Return Investments • Increase • Efficiency • Withdraw Negative • Return Investments

  7. 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

  8. 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%

  9. Example In this case decreasing ROI is good for the shareholders, thus ROI should not be maximized and therefore it is problematic controlling tool EVA: Accept project ROIReject project

  10. 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

  11. 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 Cheetah’s suggestions to IMC?

  12. 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?

  13. 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?

  14. Class Division: • Team 1: Amy, Bea, Darnell, Jeff • Team 2: George, Jessica, Joyce, Ken • Team 3: David, Lisa, Yasuyuki

  15. 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

  16. 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

  17. Thank you for your participation!

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