Gordon Distributors has three operating divisions that are defined by geographical regions. The financial results for the most recent year are shown below. The firms

Gordon Distributors has three operating divisions that are defined by geographical regions. The financial results for the most recent year are shown below. The firm’s total assets using generally accepted accounting principles (GAAP) are shown at net book value (NBV). Gordon uses a minimum desired rate of return of 12 percent for selecting new projects and for evaluating the three divisions using residual income (RI). The firm’s weighted-average cost of capital is 8 percent.

	Net Operating	Net Book Value	NBV Plus
Region	Income	(NBV)	Intangibles
Eastern	$35,440	$195,500	$225,600
Central	41,000	212,000	233,000
Western	23,600	133,000	135,000
All figures in thousands

Required
1. Calculate the ROI for each division.
2. Calculate the RI for each division.
3. Gordon has estimated the amount of intangibles that are not recorded on the firm’s financial statements using generally accepted accounting principles and has included that additional information above. Assume that adjusting for the unrecorded intangibles would increase net operating income of the Eastern, Central, and Western divisions by $22,000, $15,000, and $1,500, respectively, after tax. Determine the EVA ® for each division.
4. Compare and interpret the differences between your answers in parts 1, 2, and3.

4. The three methods produce somewhat different results. Under ROI, each of the divisions has similar performance. Under residual incom the Central Division becomes the most profitable, and the Western Division is lowest ranked. Using EVA, the Eastern and Central divisions are again very similar in performance, while the Western Division is again ranked last. Note that the Eastern Division has the largest amount of intangible assets, and for this reason has highest performance under EVA8