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 $8.4 million for year 2. R&D expenditures in year 1 amounted to $3.0 million and in year 2, R&D expenditures were $5.0 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 $34.8 million at the beginning of year 2 and current liabilities of $600,000. Bisbee computes EVA using divisional investment at the beginning of the year and a 14 percent cost of capital.

Required:

Compute EVA for Western Division for year 2. (Enter your answers in dollars, not in millions.)

Adjusted divisional income =

Cost of adjusted divisional investment =

Economic value added (EVA) =