Question

Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division Selected financial data for the past year is shown as follows. Divisional Investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses beginning of the year investment when computing ROI and residual income. Ignore income taxes. AC Division So Division Allocated corp. overhead $ 600 $ 1,800 Cost of goods sold 3,200 7, eee Divisional investment 9, eee 8e, eee R&D 2,eee 3,600 Sales 8, eee 2e, eee SGSA 700 1,530 R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D Investments had taken place before this year Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.) AC Division SO Division Economic value added

Answer 1

solution 50 DINesion AC Division 1600 economic value added 1782 Explanation ?- AC Division Adjusted profft C1500 +(50% X 2000)] 2500 Adjusted Investment 10000 9000 +(50% X 2000]] [ 2500 – [9% * 10000]] EVA 1600 50 Division 9270 Adjusted profet Adjusted Investment 1 [6070 + 18/9 x3600) ] [ 80000 + ( 819 X 3600)] [ 9270 - "C9% ¥ $3200) 83200 EVA 1782

for AC Division, R&D is assumed to benefit two periods, only expense 50% of Repo (it is assumed at the beginning of the year) each year for 50 Division, we only expense (1/a) because it e assumed that Repo berefits nine years