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 $18.018 million for year 2. R&D expenditures in year 1 amounted to $7.218 million and in year 2, R&D expenditures were $12.018 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 $72.018 million at the beginning of year 2 and current liabilities of $1,518,000. 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)
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 $18.018 million for year 2. R&D expenditures in year 1 amounted to $7.218 million and in year 2, R&D expenditures were $12.018 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 $72.018 million at the beginning of year 2 and current liabilities of $1,518,000. 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)
Chapter1: Making Economics Decisions
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Transcribed Image Text: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 $18.018 million for year 2. R&D expenditures in year 1 amounted to $7.218
million and in year 2, R&D expenditures were $12.018 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 $72.018 million at the
beginning of year 2 and current liabilities of $1,518,000. 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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