Q6

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 dlvision 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. Note: Enter your answers in dollars, not in millions. 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 dlvision 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. Note: Enter your answers in dollars, not in millions