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 $18.0 million for year 2. R&D expenditures in year 1 amounted to $7.2 million and in year 2, R&D expenditures were $12.0 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 million at the beginning of year 2 and current liabilities of $1,500,000. 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.