AAC operates a new car division (that sells high-performance sports cars) and a performance parts division (that sells performance improvement part for family cars). Some division financial measures for 2012 are:

	New Car Division	Performance Parts Division
Total Assets	40,000,000	31,562,500
Current Liabilities	6,100,000	8,300,000
Operating Income	2,600,000	2,525,000
Required rate of return	9%	9%

1- Calculate ROI for each division using operating income as a measure of income and total assets as a measure of investment.

2- Calculate residual income (RI) for each division using operating income as a measure of incomem and total assets minus current liabilities as a measure of investment.

3- William Abraham, the New Car Division manager, argues that performance parts disivsion has "loaded ip on a lot of short-term debt" to boost its RI. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the performance parts division. Comment on the result.

4- Accelerate Auto Company, whose tax rate is 35% has two sources of funds: long-term debt with a market value of $19,000,000 at an interest rate of 10%, and quity capital with a market value of $9,000,000 and a cost equity of 14%. Applying the same weighted-average cost of capital (WACC) to each division, calculate EVA for each division.

5- Use your preceding calculations to comment on the relative performance of each division.