Accounting for Decision Making and Control 8th Edition by Jerold Zimmerman

Exercise 8

R D Inc.
R D Inc. has the following financial data for the current year (millions):
Assume the tax rate is zero.
Required:
a. R D Inc. writes off R D expenditures as an operating expense. Calculate R D Inc.'s EVA for the current year.
b. R D Inc. decides to capitalize R D and amortize it over three years. R D expenditures for the last three years have been $6.0 million per year. Calculate R D Inc.'s EVA for the current year after capitalizing the current year and previous years' R D and amortizing the capitalized R D balance.
c. In the specific case of R D Inc., how does capitalizing and amortizing R D expenditures instead of expensing R D affect the incentive for managers approaching retirement to underspend on R D at R D Inc.