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57) Managerial Financial Accounting Assignments AP12-8 (b,c) Solution

# 57) Managerial Financial Accounting Assignments AP12-8 (b,c) Solution

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AP12-8 (b, c)

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EVA [LO 6] Atomic Electronics is considering instituting a plan whereby managers will be evaluated and rewarded based on a measure of economic value added (EVA). Before adopting the plan, management wants you to calculate what EVA will be in 2012 based on financial forecasts for 2012 and prior financial data. Fiscal Forecast 2012 Total assets \$55,900,000 Noninterest-bearing current liabilities 20,400,000 Sales 99,100,000 Net income 5,470,000 Interest expense 1,270,000 Research and development 2,420,000 Tax rate 35% Cost of capital 14.00% Research and development expenditures in 2010 and 2011 were \$1,200,000 and \$2,000,000 respectively. In calculating EVA, prior research and development will be capitalized and amortized assuming a three-year life (i.e., one-third will be expensed in the year incurred, and two-thirds will be capitalized and expensed in the following two years).

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Unformatted text preview: Calculate forecasted EVA for 2012. (Round calculations and final answer to 0 decimal places, e.g. 5,275.) \$[no answer] AP12-8 (b, c) Amortization Unamortized Year Cost 2010 2011 2012 Amount 2010 \$1,200,000 \$400,000 \$400,000 \$400,000 \$0 2011 2,000,000 666,667 666,667 666,667 2012 2,420,000 806,667 1,613,333 Will management be likely to support use of EVA as a financial performance measure? Yes Click here if you would like to Show Work for this question AP12-8 (b, c) Yes. Given that EVA is positive (i.e., the company is showing an economic profit measured in terms of EVA), managers may very well support introduction of EVA. It shows that they are able to earn a return greater than the cost of capital supplied to the firm....
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57) Managerial Financial Accounting Assignments AP12-8 (b,c) Solution

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