R&D Inc. has the following financial data for the current year (millions): ...
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Accounting
R&D Inc. has the following financial data for the current year (millions):
| Earnings before R&D expenditures | $21.5 |
| Interest expense | $0.0 |
| R&D expenditures | $6.0 |
| Total invested capital (excluding R&D assets) | $100.0 |
| Weighted average cost of capital | 14% |
Assume the tax rate is zero
Required:
- R&D Inc. writes off R&D expenditures as an operating expense. Calculate R&D Inc.'s EVA for the current year.
- R&D Inc. decides to capitalize R&D and amortize it over three years. R&D expenditures for the last three years have been $6.0 million per year. Calculate R&D Inc.'s EVA for the current year after capitalizing the current year and previous years' R&D and amortizing the capitalized R&D balance.
- In the specific case of R&D Inc., how does capitalizing and amortizing R&D expenditures instead of expensing R&D affect the incentive for managers approaching retirement to underspend on R&D at R&D Inc.
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