TechGlobal Inc. is evaluating the performance of its European division using Economic Value Added (EVA). The division reported the following financial data for the year:<br/><br/>- Operating Income (EBIT): $3,500,000<br/>- Tax Rate: 30%<br/>- Research & Development (R&D) Expense (expensed for GAAP): $600,000<br/>- Weighted Average Cost of Capital (WACC): 10%<br/>- Total Assets (GAAP Book Value): $18,000,000<br/>- Non-interest bearing current liabilities: $2,000,000<br/><br/>For EVA purposes, TechGlobal capitalizes R&D and amortizes it over 5 years. The current year is the first year of R&D spending. What is the division's EVA for the year?

**Step 1: Calculate Adjusted NOPAT**<br/><br/>For EVA purposes, we capitalize R&D, so we need to:<br/>- Add back the R&D expense that was deducted from GAAP EBIT<br/>- Subtract the R&D amortization (since we're capitalizing it)<br/><br/>Adjusted EBIT = GAAP EBIT + R&D Expense - R&D Amortization<br/>Adjusted EBIT = $3,500,000 + $600,000 - ($600,000 / 5 years)<br/>Adjusted EBIT = $3,500,000 + $600,000 - $120,000<br/>Adjusted EBIT = $3,980,000<br/><br/>NOPAT (Net Operating Profit After Tax) = Adjusted EBIT × (1 - Tax Rate)<br/>NOPAT = $3,980,000 × (1 - 0.30)<br/>NOPAT = $3,980,000 × 0.70<br/>NOPAT = $2,786,000<br/><br/>**Step 2: Calculate Adjusted Invested Capital**<br/><br/>Base Capital = Total Assets - Non-Interest Bearing Current Liabilities<br/>Base Capital = $18,000,000 - $2,000,000<br/>Base Capital = $16,000,000<br/><br/>Add: Net Capitalized R&D = R&D Expense - R&D Amortization<br/>Net Capitalized R&D = $600,000 - $120,000<br/>Net Capitalized R&D = $480,000<br/><br/>Adjusted Invested Capital = $16,000,000 + $480,000<br/>Adjusted Invested Capital = $16,480,000<br/><br/>**Step 3: Calculate Capital Charge**<br/><br/>Capital Charge = Adjusted Invested Capital × WACC<br/>Capital Charge = $16,480,000 × 10%<br/>Capital Charge = $1,648,000<br/><br/>**Step 4: Calculate EVA**<br/><br/>EVA = NOPAT - Capital Charge<br/>EVA = $2,786,000 - $1,648,000<br/>EVA = $1,138,000<br/><br/>**Key EVA Adjustments for R&D Capitalization:**<br/>1. **NOPAT adjustment:** R&D is treated as an investment (capital expenditure) rather than an expense, so we add it back and only deduct the current year's amortization<br/>2. **Capital adjustment:** The net capitalized R&D ($480,000) represents an investment in intangible assets and must be added to invested capital<br/>3. Both adjustments work together to properly reflect the economic value created by the division