You have been asked to make a presentation to your class on economic value added (EVA). You decide to use data from a company that produces vaccines to illustrate the concept. You have collected the following information to prepare your example. You were not sure which information you would need, so you collected more data than necessary.

Total cost and expenses excluding interest.................................................$630,000

Development costs expensed in 2016 under IFRS..........................................53,825

Development costs capitalized in 2016 under IFRS........................................15,000

EVA-adjusted total capital, December 31, 2015............................................550,000

Impairment loss of goodwill included in the calculation of IFRS income.........22,225

Net interest expense........................................................................................25,000

Research costs expensed in 2016 under IFRS................................................75,700

Revenues for 2016......................................................................................1,250,000

Additional information:

Marginal tax rate                                 = 35%

Market yield on equivalent debt         =10%

Shareholders expect a return equal to market yield plus 5%

Capital structure: Debt represents 75%, equity 25%

Assume that R&D costs occurred on January 1, 2016

Capitalized development costs are amortized over a period of 5 years for the purpose of determining IFRS income.

Development costs are amortized over the same period in the EVA-adjusted net income.

Required:

A. Compute the net profit.

B. Compute the weighted average cost of capital.

C. Compute the EVA-adjusted net income before taxes.

D. Compute the EVA.

E. Interpret the EVA results.