Normandy Instruments invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Normandy evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R&D expenditures are capitalized and then amortized over two years. Aerospace Division of Normandy shows after-tax income of $18.019 million for year 2. R&D expenditures in year 1 amounted to $7.219 million and in year 2, R&D expenditures were $12.019 million. For purposes of computing EVA, Normandy aSsumes all R&D expenditures are made uniformly over the year. Before adjusting for R& D, Aerospence Division shows assets of $72.019 millions at the beginning of year 2 and current liabilities of 1,519,000. Normandy computes EVA using divisional investment at the beginning of the year and not 12% of cost of capital.

Compute EVA for Aerospace division for year 2

Adjusted divisional income

Cost of adjusted divisional investment

Economic value adde (EVA)