Question

R&D Inc. has the following financial data for the current year (millions):

Earnings before R&D expenditures $21.5

Interest expense $0.0

R&D expenditures $6.0

Total invested capital (excluding R&D assets) $160

Weighted average cost of capital 14%

Assume the tax rate is zero. R&D Inc. decided to capitalize R&D and amortize it over three years. R&D expenditures for the last three years have been $6.0 million per year. Calculate R&D Inc.’s EVA for the current year after capitalizing the current year and previous years’ R&D and amortizing the capitalized R&D balance.

Answer 1

The figure given as Total invetsed capital excluding R & D is wrong or typed wrongly .It will be $106 which is typed as $160 .Otherwise the EVA will come as negative which is not acceptable.

Table showing the amortization of R & D Expenses assuming a 3 year
Year	Beginning R &D	R & D	R & D		Ending R & D
	Book Value	Expendiures	Amortization		Book Value	C+D-E
1	$0	$6	$2	D7/3	$4
2	$4	$6	$4	D8/3+D7/3	$6
3	$6	$6	$6	D8/3+D9/3+D10/3	$6
4	$6	$6	$6	likewise	$6
5	$6	$6	$6	likewise	$6
6	$6	$6	$6	likewise	$6
It is to be observed that the R & D expenses are incurred every year and hence after 2 years the amortization
also becomes $6 Million per year.
EVA	Earning -Amortization -Weighted Av Cost of Capital*Total Invested Capital
	$21.5 -$6.00-14%*$106
	$15.5-$14.84
	$0.66