Question

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 beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes.

	AC Division			SO Division
Allocated corp. overhead	$	645		$	1,350
Cost of goods sold		3,290			5,100
Divisional investment		9,900			75,500
R&D		2,450			3,150
Sales		9,800			17,500
SG&A		835			1,080

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.)

Answer 1

	AC	SO
Adjusted Profit	3805	9620
	2580+((2-1)/2)*2450	6820+((9-1)/9)*3150
Adjusted Investment	11125	78300
	9900+((2-1)/2)*2450	75500+((9-1)/9)*3150
EVA	2915	3356
	3805-11125*0.08	9620-78300*0.08
Calculation of Profit	AC	SO
Sales	9,800	17,500
Less
Allocated corp. overhead	645	1350
Cost of goods sold	3,290	5,100
R&D	2,450	3,150
SG&A	835	1080
Profit	2580	6820