Question 6 (12 Marks)

The following information pertains to Kaizen Image Inc. for the year ended December 31, 2019

Kaizen Image Inc.

Consolidated Balance Sheet

December 31, 2019

Assets

Current assets

Cash$210,000

Receivables195,000

Inventories380,000

785,000

Net property, plant and equipment1,100,000Goodwill450,000

Total assets$2,335,000

Liabilities

Current liabilities

Payables$580,000

Long-term debt800,000

Total liabilities$1,380,000

Shareholders' Equity

Common shares 705,000

Retained earnings250,000

Total liabilities and shareholders' equity$2,335,000

Operating income before taxes 2019 $160,000

Impairment loss of goodwill included in the calculation of income 2,800

Development cost in 2019 expensed 8,200

Research costs in 2019 expensed 12,600

Additional information

1. The marginal tax rate is 40%.

2. The cost of equity is 9%.

3. The market yield on equivalent debt is 4%.

4. Assume that all research and development costs were incurred on January 1.

5. Assume that the fair values of debt and equity are same to the accounting values.

6. Capitalized costs are amortized over a period of 6 years.

Required:

a) Determine the economic value added (EVA) for the year December 31, 2019. (8 marks)

b) Explain the meaning and significance of your answer to part (a).Identify and briefly explain the major differences, if any, between EVA income and GAAP income. (1 marks)

c) Briefly explain the difference between return on investment, residual income, and EVA (no computation is necessary). (2 marks)

d) Indicate how EVA and residual income would be incorporated in a balanced scorecard (BSC). Briefly explain whether this incorporation would be useful. (1 marks)