Question 3:

The annual information for one division at Webster, Inc. is shown below.

Income Statement Information
Marketing expenses	$ 400,000
Operating income	$1,500,000
Income tax expense (30% tax rate)	$ 450,000
Balance Sheet Information
Average operating assets	$2,350,000
Non-interest bearing current liabilities	$ 200,000
Percent cost of capital	18%

To calculate economic value added (EVA), management requires adjustments for marketing and non-interest bearing current liabilities as outlined below.

Marketing will be capitalized and amortized over several years resulting in an increase to average operating assets of $250,000 for the division. On the income statement, marketing expenses for the year will be added back to operating income, then marketing amortization expense for one year will be deducted. The current year amortization expense will total $120,000 for the division.

Non-interest bearing liabilities will be deducted from average operating assets.

After the EVA adjustments to average operating assets, the amount of average operating assets (adjusted) for the division is

division is

a) $2,150,000

b) $2,400,0000

c) $2,550,000

d) $2,270,000