Residual Income and EVA; timing issues Doorchime Company makes doorbells. It has a weighted average cost of capital of 9%, and total assets of $5,550,000. Doorchime has current liabilities of $800,000. Its operating income for the year was $630,000. Doorchime does not have to pay any income taxes. One of the expenses for accounting purposes was a $90,000 advertising campaign. The entire amount was deducted this year, although the Doorchime CEO believes the beneficial effects of this advertising will last four years.

Required

1. Calculate residual income, assuming Doorchime defines investment as total assets.

2. Calculate EVA for the year. Adjust both the assets and operating income for advertising assuming that for the purposes of economic value added the advertising is capitalized and amortized on a straightline basis over four years.

3. Discuss the difference between the outcomes of requirements 1 and 2 and which measure is preferred.