Reference no: EM132769327

Vinkman Corporation invests heavily in Advertising. Under GAAP, it must treat advertising expenditures as current expenses for financial accounting purposes. To encourage investment in advertising, Vinkman evaluates its division managers using EVA. The company adjusts accounting income for advertising expenditures by assuming these expenditures create assets with a three year life. That is, advertising expenditures should be capitalized and then amortized over three years. Vinkman's cost of capital is 14%.

Alpha division of Vinkman shows an after-tax income of $3,000,000 for year 3. Advertising expenditures amounted to $1,200,000 in year one, $1,400,000 in year two, and $1,800,000 in year three. Vinkman believes that advertising benefits should be amortized as follows: 50% in the first period/year, 30% in the second period, and 20% in the third period. For purposes of computing EVA, Vinkman assumes all advertising expenditures are made in the first month of the year. Before adjusting for advertising Alpha division shows assets of $12,000,000 at the beginning of year 3 and current liabilities of $800,000.

Required:

Problem 1: Compute EVA for Alpha division for Year 3.