Compute eva for the two divisions

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Reference no: EM131367114

Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.

AC Division SO Division

Allocated corp. overhead $ 600 $ 1,800

Cost of goods sold 3,200 7,000

Divisional investment 9,000 80,000

R&D 2,000 3,600

Sales 8,000 20,000

SG&A 700 1,530

R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken place before this year.

Required: a. Compute EVA for the two divisions. (Do not round intermediate calculations.)

Reference no: EM131367114

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