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ROI, Residual Income, and EVA® Jean Cooper Cosmetics (JCC) manufactures a variety of products and is organized into three divisions (investment centers): soap products, skin lotions, and hair products. Information about the most recent year's operations follows. The information includes the value of intangible assets including research and development, patents, and other innovations that are not included on JCC's balance sheet. Were these intangibles to be included in the financial statements (as they are for EVA®), the increase in the balance sheet and the increase in after-tax operating income are as given below.
Division
Operating Income
Average Total Assets
Value of Intangibles
Intangibles' Effect on Income
Soap products
$3,250,000
$60,000,000
$1,500,000
$1,000,000
Skin lotions
2,750,000
33,000,000
8,000,000
6,000,000
Hair products
5,000,000
55,000,000
1,000,000
700,000
Minimum desired rate of return 5.00%
Cost of capital 4.00%
Required
1. Calculate the ROI for each division.
2. Calculate the residual income (RI) for each division.
3. Calculate EVA for each division and comment on your answers for ROI, RI, and EVA.
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