Atomic Electronics is considering instituting a plan whereby managers will be ev
ID: 2370508 • Letter: A
Question
Atomic Electronics is considering instituting a plan whereby managers will be evaluated and rewarded based on a measure of economic value added (EVA). Before adopting the plan, management wants you to calculate what EVA will be in 2012 based on financial forecasts for 2012 and prior financial data.
Fiscal Forecast
2012
Total assets $55,200,000
Noninterest-bearing current liabilities 20,700,000
Sales 99,100,000
Net income 5,570,000
Interest expense 1,260,000
Research and development 2,430,000
Tax rate 35%
Cost of capital 13.50%
Research and development expenditures in 2010 and 2011 were $1,200,000 and $2,000,000 respectively. In calculating EVA, prior research and development will be capitalized and amortized assuming a three-year life (i.e., one-third will be expensed in the year incurred, and two-thirds will be capitalized and expensed in the following two years).
Incorrect.
Calculate forecasted EVA for 2012. (Round calculations and final answer to 0 decimal places, e.g. 5,275.)
$
Explanation / Answer
EVA= Net operating profit after tax(NOPA) - (Capital*Cost of capital) Calculation of NOPAT: NOPAT= Net income*(1-Taxes) = 5,570,000*(0.65) = 3,620,500 R&D cost in 2010 is 2/3 800,000 R&D cost in 2011 is 2/3 1333333.4 R&D cost in 2012 is 1/3 810,000 Total expenditure for 2012 3,343,333.4 This expenditure is added to the debt. Capital amount= Total assets - ( Non-interest bearing current liablilities + Total R&D expenditure) =$55,200,000 - (20,700,000+3,343,333.4) =55,200,000 - 25,043,333.4=30,156,666.6Cost of capital is 13.5%. EVA= 3,620,500- 30,156,666.6*0.135(1-0.35) = 3,620,500 -2,646,247.4415 = 974,252.5585 EVA is $974,252 EVA is $974,252 R&D cost in 2010 is 2/3 800,000 R&D cost in 2011 is 2/3 1333333.4 R&D cost in 2012 is 1/3 810,000 Total expenditure for 2012 3,343,333.4
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