United Connections* In late 2016, Jennifer Parker was promoted to manager of the TG division of United Connections, Inc. Jennifer was one of the first employees United Connections hired when it started the TG division in 2008, as part of the broader corporate strategy to expand its suite of corporate networking solutions. TG's primary business is collecting, compiling, and selling contact information of executives, including information about their social networks. Given its business model, the division's costs are mostly related to selling, general, and administrative, in addition to some research and development. At the beginning of 2019, Jennifer faced her first major performance review since taking control of the division. To this end, United Connections' CFO prepared condensed financial information for the TG division for years 2015-2018, as summarized in Exhibit 1. Answer the following. 1. Recalculate the financial information tabulated in Exhibit 1, assuming that, for performance evaluation purposes at United Connections, R&D expenditures should be capitalized rather than expensed. Assume that R&D expenditures provide equal benefits over three years, beginning (that is, including) the year they are purchased and capitalized. Also assume that R&D expense for the division was 933 thousand in 2014, 621 thousand in 2013, and zero prior. 2. Describe Jennifer's performance in 2017 and 2018 based on each of the following (using book values, not market values, if the performance metric includes assets): a. Adjusted operating income (i.e., operating income, adjusted for R&D being capitalized and amortized over three years, as in 1.) b. EVA, using ending period values for debt, adjusted capital employed (i.e., adjusted net operating assets), and the respective annual WACC rate. c. Return on investment (ROI), where ROI equals adjusted operating income / ending adjusted net operating assets. Do all three metrics provide similar conclusions? Explain whether you see any "red flags" with regards to the TG division given the metrics and differences among them. 3. Most EVA proponents argue that the capital employed component of EVA should be based on the market value of assets (i.e., sum of the market values of debt and equity). See, for example, the related discussion in the Desai and Ferri (2006) HBS note. Do you agree with this approach? Discuss any limitations that you think this approach could create for performance evaluation.Exhibit 1: Comparative Condensed Financial Information-TG Division all amounts in thousands 2015 2016 2017 2018 Revenue 10,764 11.239 11,090 11.644 Operating expenses, excl R&D -7.112 -7.586 -7.940 -7.200 R&D expense -1,563 -1,644 -1,740 -1,755 Operating income 2.089 2,009 1.410 2.689 Interest expense -712 -725 -730 -731 Net income 1.377 1.284 680 1,958 Ending total assets At net book value 20.160 20.048 24.635 27.667 At estimated market value 27,000 27.000 26,000 25,000 Ending non-interest yielding liabilities 3.245 3.098 3.677 3.902 Ending estimated market value of equity 10,500 10,500 10.000 9.500 Tax rate 0% 0% 0% 0% WACC 6.17% 6.17% 6.15% 6.14%