EVA = Net Operating Profit after tax - (Capital employed * Cost of Capital)
To find out NOPAT (Net Operating Profit after tax), Income Statement is prepared as shown below:
Colonial Pharmaceuticals | ||
Statement of Divisional Income | ||
Particulars | AC Division | SO Division |
Sales | $ 10,800 | $ 20,000 |
Cost of goods sold | $ 3,340 | $ 5,600 |
Gross Margin | $ 7,460 | $ 14,400 |
Allocated corp. overheads | $ 670 | $ 1,100 |
SG&A | $ 910 | $ 830 |
R&D | $ 1,350 | $ 400 |
Operating Income / Divisional Income | $ 4,530 | $ 12,070 |
R&D cost is going to give benefits for more than one year hence it is not fully expense out in current year. For AC division it will give benefit for 2 years hence total cost cost is divided by 2, on the same lines for SO division total cost is divided by 9 years.
As Income tax is to be ignored so Operating Income = NOPAT for current case.
Cost of Capital is 8% as mentioned in question.
Divisional investment is $ 10,400 for AC division & $ 73,000 for SO division. This can also be termed as capital employed
EVA = Net Operating Profit after tax - (Capital employed * Cost of Capital)
EVA for AC division = $ 4,530 - ( $ 10,400 * 8%) = $ 3,698
EVA for SO division = $ 12,070 - ( $ 73,000 * 8%) = $ 6,230
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions,...
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 as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses...
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 as follows. Divisional Investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses...
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 as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses...
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 as follows. Divisional Investment is as of the beginning of the year Colonial Pharmaceuticals uses a 9 percent cost of capital and uses...
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 as follows. Divisional Investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses...
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 as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 10 percent cost of capital and uses...
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...
Problem 14-45 (Algo) Comparing Business Units Using EVA: Solving for the Economic Life of the Investment (LO 14-4)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 as follows. Divisional investment is as...
Wellness Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, based on the products they produce. BD Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger PM Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Wellness Pharmaceuticals uses a 9 percent cost of capital and beginning-of-the-year investment when computing...
Wellness Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, based on the products they produce. BD Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger PM Division. Selected financial data for the past year is shown below. Divisional investment is as of the beginning of the year. Wellness Pharmaceuticals uses a 9 percent cost of capital and beginning-of-the-year investment when computing...