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Universal Electronics, Inc. (UEI), which started operations one year ago, has two divisions: Consumer and Commercial. Both divisions invest heavily in R&D, which is assumed to benefit five years. R&D spending is made uniformly throughout the year. UEI has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows. Consumer Commercial Sales revenue $ 54,000 $ 85,000 Divisional income 11,500 11,925 Divisional investment 35,500 39,750 Current liabilities 4,200 4,000 R&D 4,200 4,200 Required: Evaluate the performance of the two divisions assuming UEI uses economic value added (EVA)

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  1. Today, 08:04
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    Consumer EVA 7, 133.00

    Commercial EVA 7,090.50

    Both are profitable

    Explanation:

    The EVA (economic value added) is the result from subtracting the cost of capital of the investment to their divisional income. This will determinate if the division increase the company's capital or destroyed (as it return less than optimal/desired)

    Consumer Income 11,500

    Investment: 35,500 + 4,200 = 39,700

    EVA: 11,500 - 39,700 x 11% = 7, 133

    Commercial Income 11,925

    Investment: 39,750 + 4,200 = 43,950

    EVA: 11,925 - 43,950 x 11% = 7090.5

    Both division are profitable as they generate more income than the cost of the investment
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