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 $18.006 million for year 2. R&D expenditures in year 1 amounted to $7.206 million and in year 2, R&D expenditures were $12.006 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 $72.006 million at the beginning of year 2 and current liabilities of $1,506,000. 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. complete but not entirely correct. nal income 1 divisional investment added (EVA) $ 12,340,000 43,000,000 x $ 18,540,000
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 $18.006 million for year 2. R&D expenditures in year 1 amounted to $7.206 million and in year 2, R&D expenditures were $12.006 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 $72.006 million at the beginning of year 2 and current liabilities of $1,506,000. 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. complete but not entirely correct. nal income 1 divisional investment added (EVA) $ 12,340,000 43,000,000 x $ 18,540,000
Chapter25: Taxation Of International Transactions
Section: Chapter Questions
Problem 26P
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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 $18.006 million for year 2. R&D expenditures in year 1 amounted to $7.206
million and in year 2, R&D expenditures were $12.006 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 $72.006 million at the
beginning of year 2 and current liabilities of $1,506,000. 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.
complete but not entirely correct.
nal income
1 divisional investment
added (EVA)
$ 12,340,000
43,000,000 x
$ 18,540,000
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