Atomic Electronics is considering instituting a plan whereby managers will be evaluated and rewarded based on a measure of economic value added (EVA). Before adopting the plan, management wants you to calculate what EVA will be in 2009 based on financial forecasts for 2009 and prior financial data.

Research and development expenditures in 2007 and 2008 were \(\$ 900,000\) and \(\$ 1,800,000\), 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 expensed in the following two years).
Required
a. Explain why it is important to capitalize research and development if managers are to be rewarded based on EVA.
b. Calculate forecasted EVA for 2009.
c. Will management be likely to support use of EVA as a financial performance measure?

Total assets Noninterest-bearing current liabilities Sales Net income Interest expense Research and development Tax rate Cost of capital Fiscal Forecast 2009 $54,000,000 20,000,000 98,000,000 5,000,000 1,000,000 2,100,000 35% 14%