Problem 14-44 (Algo) Comparing Business Units Using Economic Value Added (EVA) (LO 14-4) Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced larger SO Division. Selected financial data for the past year is shown as follows. Divislonal investment is as of the beginning of year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beglnning of the-year Investment when computing RC residual income. Ignore income taxes. AC Division 50 Division $1,650 6,000 78, 500 3,600 18, 500 1,380 Allocated corp. overhead Cost of goods sold Divisional investment $ 615 3,230 9,300 2,150 8,600 745 R&D Sales SGRA R&D is assumed to have a two-year life in the AC Division and a nine year life in the SO division. All R&D expenditures are spent beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D Investments had taken place before year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) AC Division SO Division Economic value added
Problem 14-44 (Algo) Comparing Business Units Using Economic Value Added (EVA) (LO 14-4) Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced larger SO Division. Selected financial data for the past year is shown as follows. Divislonal investment is as of the beginning of year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beglnning of the-year Investment when computing RC residual income. Ignore income taxes. AC Division 50 Division $1,650 6,000 78, 500 3,600 18, 500 1,380 Allocated corp. overhead Cost of goods sold Divisional investment $ 615 3,230 9,300 2,150 8,600 745 R&D Sales SGRA R&D is assumed to have a two-year life in the AC Division and a nine year life in the SO division. All R&D expenditures are spent beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D Investments had taken place before year. Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) AC Division SO Division Economic value added
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
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Transcribed Image Text:Problem 14-44 (Algo) Comparing Business Units Using Economic Value Added (EVA) (LO 14-4)
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the
products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the
larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the
year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning of the-year Investment when computing ROI and
residual income. Ignore income taxes.
Allocated corp. overhead
Cost of goods sold
Divisional investment
R&D
AC Division
$ 615
3,230
9,300
2,150
8,600
so Division
$ 1,650
6,000
78, 500
3,600
18, 500
1,380
Sales
SGRA
745
R&D is assumed to have a two-year life in the AC Divisilon and a nine year life in the SO 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
уear
Required:
a. Compute EVA for the two divisions. (Do not round intermediate calculations.)
AC Division
SO Division
Economic value added
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