Pharma Inc. has two product lines organized as divisions (Pain Reliever and Weight Loser) and...
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Accounting
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 RelieverWeight 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.
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