C HEETAH D IVISION Elvira & Van March 16, 2004

Cheetah ROI  ROI –Ratio: Profit Margin Asset Turnover

Cheetah Increase in ROI  Reduce Expenses  Increase Sales  Reduce Assets

Cheetah 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

Cheetah EVA  EVA –Dollar amount EVA= Net Profit – Capital Charge where Capital Charge = Cost of capital * Capital employed

Cheetah Increase in EVA  Increase Positive Return Investments  Increase Efficiency  Withdraw Negative Return Investments

Cheetah EVA in Performance Measurement  Allows to invest into all projects that generate profit in excess of cost of capital –ExampleExample  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

Cheetah 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 InvestmentInvestment After InvestmentChange Capital Operating profit30434 COC10% ROI30%20%28%-2% EVA

Cheetah Example In this case decreasing ROI is good for the shareholders, thus ROI should not be maximized and therefore it is problematic controlling toolROI EVA: Accept projectROI Reject project

Cheetah 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

Cheetah 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?

Cheetah 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?

Cheetah 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?

Cheetah Class Division:  Team 1: Amy, Bea, Darnell, Jeff  Team 2: George, Jessica, Joyce, Ken  Team 3: David, Lisa, Yasuyuki

Cheetah 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

Cheetah 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

Cheetah Thank you for your participation!