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Normandy Instruments invests heavily in research and development (R\&D), although it must currently treat its...

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Accounting

image Normandy Instruments invests heavily in research and development (R\&D), although it must currently treat its R\&D expenditures as expenses for financial accounting purposes. To encourage investment in R\&D, Normandy evaluates its division managers using EVA. The company adjusts accounting income for R\&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R\&D expenditures are capitalized and then amortized over two years. Aerospace Division of Normandy shows after-tax income of $18.006 million for year 2 . R\&D expenditures in year 1 amounted to $7.206 million and in year 2, R\&D expenditures were $12.006 million. For purposes of computing EVA, Normandy assumes all R\&D expenditures are made uniformly over the year. Before adjusting for R\&D, Aerospace Division shows assets of $72.006 million at the beginning of year 2 and current liabilities of $1,506,000. Normandy computes EVA using divisional investment at the beginning of the year and a 12 percent cost of capital. Required: Compute EVA for Aerospace Division for year 2

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