Pharma Inc. has two product lines organized as divisions (Pain Reliever and Weight Loser) and spends heavily on research and development (R&D) activities. The following information is related to Pharma Inc.’s second year of operations.

	Pain Reliever	Weight Loser
R&D expenditures (second year)	$450,000	$300,000
After-tax income	275,000	$210,000
Current liabilities	584,000	397,000
Divisional investment	1,365,000	982,000
Cost of capital	23%	23%

In the first year, Pain Reliever spent $300,000 on R&D, while Weight Loser spent $150,000. Pharma Inc. estimates that R&D expenditures have a three-year life to be amortized according to the following schedule: 1/6 in the year incurred, 1/3 in the next two years, and 1/6 in the fourth year after the initial spending.

Required:

Calculate EVA for the two divisions of Pharma Inc. for its second year of operations.

Answer rating: 100% (QA)

Step 1 EVA means net amount by which companys wealth is increased It depends upon the earnings aft... View the full answer