RI, EVA®. The Burlingame Transport Company operates two divisions, a Truck Rental Division that rents to individuals, and a Transportation Division that transports goods from one city to another. Results reported for the last year are as follows:

946 CHAPTER 24 Truck Rental Transportation Division Division Total assets $780,000 $1,140,000 Current liabilities 144,000 240,000 Operating income before tax 90,000 192,000 Required 1. Calculate the residual income for each division using operating income before tax and investment equal to total assets minus current liabilities. The required rate of return on investments is 12%.

2. The company has two sources of funds: long-term debt with a market value of $1,080,000 at an interest rate of 10% and equity capital with a market value of $720,000 at a cost of equity of 15%. Burlingame’s income tax rate is 40%. Burlingame applies the same weighted-average cost of capital to both divisions, since each division faces similar risks.

Calculate the economic value added (EVA®) for each division.

3. Using your answers to requirements 1 and 2, what would you conclude about the per¬
formance of each division? Explain briefly.