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 2021, based on financial forecasts for 2021 and prior financial data. 

Research and development expenditures in 2019 and 2020 were $1,200,000 and $2,100,000, respectively. In calculating EVA, prior research and development will be capitalized and amortized assuming a threeyear 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 2021. 

c. Will management be likely to support use of EVA as a financial performance measure?

Fiscal Forecast 2021 Total assets $ 60,500,000 Noninterest-bearing current liabilities 23,100,000 Sales 110,000,000 Net income 6,050,000 Interest expense Research and development 1,320,000 2,640,000 Tax rate 20% Cost of capital 15%