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 asexpenses for financial accounting purposes. To encourage investment in R&D, Normandy evaluates its division managers using EVAThe 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 $18.004 million for year 2, R&D expenditures in year 1 amounted to $7.204million and in year 2, R&D expenditures were $12.004 million. For purposes of computing EVA, Normandy assumes all R&Dexpenditures are made uniformly over the year. Before adjusting for R&D, Aerospace Division shows assets of $72.004 million at thebeginning of year 2 and current liabilities of $1,504,000. Normandy computes EVA using divisional investment at the beginning of theyear 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 incomeCost of adjusted divisional investmentEconomic value added (EVA)

Economic value added is helpful in computing the amount of economic profit the company generates…

Answered: Normandy Instruments invests heavily in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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. Ryan Alcoa, a new associate at Jonas Partners, has compiled the following data for a potential investment for the firm: Investment: $300,000 Annual sales revenues = $180,000 Annual cash costs = $80,000 4-year useful life,no salvage value Jonas Partners faces a 30% tax rate on income and is aware that the tax authorities will only permit straightline depreciation for tax purposes. The firm has an after-tax required rate of return of 8%. Q. Based on net present value considerations, is this a project Jonas Partners would want to take?
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