The following income statements and other information are available for the Biltmore Company:
$\begin{array}{lrr}&2014&2013\
\text { Sales } & \$ 230,000,000 & \$ 220,000,000 \
\text { Cost of goods sold } & \underline{105,000,000} & \underline{96,000,000} \
\text { Gross margin } & \underline{145,000,000} & \underline{124,000,000}\
\text { Selling and administrative costs } & 25,000,000 & 22,500,000 \
\text { Research and development } & 15,600,000 & 12,400,000 \
\text { Income from operations } & 104,400,000 & 89,100,000 \
\text { Income taxes expense } & 36,540,000 & 31,185,000\
\text { Net income }&\$67,860,000&\$67,915,000\
\text { Total assets }&\$ 650,000,000 & \$ 605,000,000 \
\text { Noninterest-bearing current liabilities }&\$ 15,000,000 & \$ 12,300,000
\end{array}$
Biltmore's interest expense is $0, its income tax rate is 35 percent, and its cost of capital is 10 percent. Biltmore amortizes R&D over 4 years. By how much is invested capital adjusted as it relates to computing EVA for 2014?

Question

Quizplus · Accepted Answer

EVA is calculated as net income less the product of the cost of capital and invested capital. Invested capital is defined as total assets less noninterest-bearing current liabilities. In this case, invested capital is $650,000,000 - $15,000,000 = $635,000,000. The cost of capital is 10%, so the product of the cost of capital and invested capital is $635,000,000 x 10% = $63,500,000. Net income is $67,860,000, so EVA is $67,860,000 - $63,500,000 = $4,360,000.Invested capital is adjusted for R&D by adding back the amount of R&D that was expensed in the current year. In this case, R&D was $15,600,000, so invested capital is adjusted to $635,000,000 + $15,600,000 = $650,600,000. The product of the cost of capital and invested capital is now $650,600,000 x 10% = $65,060,000. EVA is now $67,860,000 - $65,060,000 = $2,800,000.The difference between the two EVA calculations is $4,360,000 - $2,800,000 = $1,560,000. This is the amount by which invested capital is adjusted as it relates to computing EVA for 2014.

The Following Income Statements and Other Information Are Available for the Biltmore