Bisbee Health Products 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, Bisbee 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.

Western Division of Bisbee shows after-tax income of $8.2 million for year 2. R&D expenditures in year 1 amounted to $3.8 million and in year 2, R&D expenditures were $5.4 million. For purposes of computing EVA, Bisbee assumes all R&D expenditures are made at the beginning of the year. Before adjusting for R&D, Western Division shows assets of $32.3 million at the beginning of year 2 and current liabilities of $620,000. Bisbee computes EVA using divisional investment at the beginning of the year and a 16 percent cost of capital.

Required:

Compute EVA for Western Division for year 2.

Adjusted divisional income ?

cost of adjusted divisional investment?

Economic value added ?