Atomic Electronics is considering instituting a plan whereby managers will be ev
ID: 2745431 • Letter: A
Question
Atomic Electronics is considering instituting a plan whereby managers will be evaluated and rew2arded based on a measure of economic value added (EVA). Before adopting the plan, management wants you to calculate what EVA will be in 2015, based on financial forecasts for 2015 and prior financial data. Research and development expenditures in 2013 and 2014 were $1, 140,000 and $2, 070,000, 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 expended in the following two years). Calculate forecasted EVA for 2015.Explanation / Answer
Answer
Notes :
In answering the question following assumptions are made.
Figures In $
Particulars
Amount
Total assets
a
60,430,000
Noninterest-bearing current liabilities
b
-23,200,000
Research & Development
Year 2013
(1,140,000/3)
c
380,000
Year 2014
(2,070,000*2)/3
d
1,380,000
Year 2015
e
2,583,000
Net Investment (a+b+c+d+e)
f
41,573,000
Net Income
g
6,059,000
Actual Return (g/f)
14.57%
Cost of capital
15%
Answer : As actual return is less than the cost of capital, so there will not be any EVA for the year 2015.
Figures In $
Particulars
Amount
Total assets
a
60,430,000
Noninterest-bearing current liabilities
b
-23,200,000
Research & Development
Year 2013
(1,140,000/3)
c
380,000
Year 2014
(2,070,000*2)/3
d
1,380,000
Year 2015
e
2,583,000
Net Investment (a+b+c+d+e)
f
41,573,000
Net Income
g
6,059,000
Actual Return (g/f)
14.57%
Cost of capital
15%
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