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Compute EVA

Compute EVA

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Problem 14-60 (Algo) Economic Value Added (LO 14-4) Normandy Instruments invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Normandy evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R&D expenditures are capitalized and then amortized over two years. Aerospace Division of Normandy shows after-tax income of $18.015 million for year 2. R&D expenditures in year 1 amounted to $7.215 million and in year 2, R&D expenditures were $12.015 million. For purposes of computing EVA, Normandy assumes all R&D expenditures are made uniformly over the year. Before adjusting for R&D, Aerospace Division shows assets of $72.015 million at the beginning of year 2 and current liabilities of $1,515,000. Normandy computes EVA using divisional investment at the beginning of the year and a 12 percent cost of capital. Required: Compute EVA for Aerospace Division for year 2. Note: Enter your answers in dollars, not in millions. Adjusted divisional income Cost of adjusted divisional investment Economic value added (EVA)
Transcribed Image Text:Problem 14-60 (Algo) Economic Value Added (LO 14-4) Normandy Instruments invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Normandy evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R&D expenditures are capitalized and then amortized over two years. Aerospace Division of Normandy shows after-tax income of $18.015 million for year 2. R&D expenditures in year 1 amounted to $7.215 million and in year 2, R&D expenditures were $12.015 million. For purposes of computing EVA, Normandy assumes all R&D expenditures are made uniformly over the year. Before adjusting for R&D, Aerospace Division shows assets of $72.015 million at the beginning of year 2 and current liabilities of $1,515,000. Normandy computes EVA using divisional investment at the beginning of the year and a 12 percent cost of capital. Required: Compute EVA for Aerospace Division for year 2. Note: Enter your answers in dollars, not in millions. Adjusted divisional income Cost of adjusted divisional investment Economic value added (EVA)
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