The Bio Med Company has spent $1.2 million, $1.5 million, and $1.8 million over the last three years on R&D of its pharmaceuticals division, and spent $2.4 million this year.

a. Calculate the amount of R&D assets and R&D expense in the current year under two alternative accounting procedures: (1) all current year R&D is expensed immediately, and (2) R&D is capitalized and then amortized over three years. (Assume that all R&D spending for the year occurs on the first day of the year.) The above company has EVA before R&D of $15.2 million and a weighted-average cost of capital of 20 percent.

b. Explain how EVA is a better measure for divisional performance evaluation, as compared to RI and ROI.

c. Calculate its EVA under two alternative accounting procedures: (1) All current year R&D is expensed immediately, and (2) R&D is capitalized and then amortized over three years.

d. Comment on how the two alternative accounting procedures impact the calculation of EVA and managerial decision making.