Assignment - High-Tech Company - economic value added
The following information pertains to High-Tech Company for the year ended December 31, 2013:
|
Net operating income before taxes
|
$ 422,000
|
|
EVA adjusted total capital, December 31, 2013
|
3,500,000
|
|
Research costs in 2013 expensed under GAAP
|
75,600
|
|
Development costs expensed in 2013 under GAAP
|
55,000
|
|
Development costs capitalized in 2013 under GAAP
|
83,000
|
|
Impairment loss of goodwill included in the calculation of GAAP income
|
23,400
|
Additional information:
- The capital structure is 38% debt and 62% equity.
- The market yield on equivalent debt is 6.5%.
- The marginal tax rate is 35%.
- The cost of equity is 12%.
- Research and development costs were incurred on January 1, 2013.
- Capitalized development costs are amortized over a period of 5 years in GAAP income; R&D costs are amortized over the same period in net operating profit after taxes (NOPAT).
Required
a. Determine the economic value added (EVA) for the year ended December 31, 2013, and explain the results.
b. Should the financial performance at High-Tech be measured using EVA or ROI? Address the following points in your answer:
i. The purpose of financial performance measures
ii. Advantages and disadvantages of each measure
iii. The difference between accounting and economic income
c. As an outside consultant, you are asked for some advice on effective performance measures. Chapter 11 of the Merchant text describes six financial results control remedies that can reduce a manager's tendency to focus on short-term results. Select two of these remedies and draft a one or two paragraph memo to the management accountant at High-Tech with a comprehensive explanation that includes:
- How the remedy increases the manager's long term focus
- Issues with the remedy and its implementation
- An action plan that outlines two or three steps the company should take to implement the remedy
Note: Foundation review 3 provides a review of memo writing and the acceptable format.