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es Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses a(n) 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corporate overhead Cost of goods sold Divisional investment R&D Sales. Selling, general and administrative (excluding R&D) Division Canal (5000) $4,600 25,000 60,600 12,500 60,000 5,000 Lake (5000) $ 9,850 30,500 400,000 54,000 150,000 7,750 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. The manager of the Canal Division complains that the calculation of EVA is unfair because a much longer life is assumed for the Lake Division in calculating EVA. The manager of Lake Division responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in Lake Division do have a longer life. Required: a. Assume that the economic life of R&D investments is three years in the Canal Division. What economic life would the R&D investments in the Lake Division have to make EVA in the two divisions equal?

es Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses a(n) 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corporate overhead Cost of goods sold Divisional investment R&D Sales. Selling, general and administrative (excluding R&D) Division Canal (5000) $4,600 25,000 60,600 12,500 60,000 5,000 Lake (5000) $ 9,850 30,500 400,000 54,000 150,000 7,750 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. The manager of the Canal Division complains that the calculation of EVA is unfair because a much longer life is assumed for the Lake Division in calculating EVA. The manager of Lake Division responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in Lake Division do have a longer life. Required: a. Assume that the economic life of R&D investments is three years in the Canal Division. What economic life would the R&D investments in the Lake Division have to make EVA in the two divisions equal?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses a(n) 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corporate overhead Cost of goods sold Divisional investment R&D Sales Selling, general and administrative (excluding R&D) Division Canal (5000) $ 4,600 25,000 60,600 12,500 60,000 5,000 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Economic life Lake ($000) $ 9,850 30,500 400,000 54,000 150,000 7,750 The manager of the Canal Division complains that the calculation of EVA is unfair because a much longer life is assumed for the Lake Division in calculating EVA. The manager of Lake Division responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in Lake Division do have a longer life. years Required: a. Assume that the economic life of R&D investments is three years in the Canal Division. What economic life would the R&D investments in the Lake Division have to make EVA in the two divisions equal? Note: Do not round intermediate calculations. Round final answer to 1 decimal place.
Transcribed Image Text:Navarre Energy Research specializes in developing and commercializing new products. It is organized into two divisions, which are based on the products they produce. Canal Division is smaller, and the lives of the products it produces tend to be shorter than those produced by the larger Lake Division. Selected financial data for the past year are shown in the following table. Divisional investment is as of the beginning of the year. Navarre uses a(n) 8 percent cost of capital and beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. Allocated corporate overhead Cost of goods sold Divisional investment R&D Sales Selling, general and administrative (excluding R&D) Division Canal (5000) $ 4,600 25,000 60,600 12,500 60,000 5,000 R&D is assumed to have a three-year life in Canal Division and an eight-year life in Lake Division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year. Economic life Lake ($000) $ 9,850 30,500 400,000 54,000 150,000 7,750 The manager of the Canal Division complains that the calculation of EVA is unfair because a much longer life is assumed for the Lake Division in calculating EVA. The manager of Lake Division responds that EVA is supposed to reflect economic reality and that the reality is that R&D investments in Lake Division do have a longer life. years Required: a. Assume that the economic life of R&D investments is three years in the Canal Division. What economic life would the R&D investments in the Lake Division have to make EVA in the two divisions equal? Note: Do not round intermediate calculations. Round final answer to 1 decimal place.
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