Bisbee Health Products invests heavily in research and development (R\&D), although it must currently treat...
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Bisbee Health Products 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, Bisbee 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. Western Division of Bisbee shows after-tax income of $7.9 million for year 2. R\&D expenditures in year 1 amounted to $3.6 million and in year 2, R\&D expenditures were $5.0 million. For purposes of computing EVA, Bisbee assumes all R\&D expenditures are made at the beginning of the year. Before adjusting for R\&D. Western Division shows assets of $31.0 million at the beginning of year 2 and current liabilities of $650,000. Bisbee computes EVA using divisional investment at the beginning of the year and a 12 percent cost of capital: Required: Compute EVA for Western Division for year 2. (Enter your answers in dollars, not in millions.)
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