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    CASE Solution Vyaderm

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    Ishan Shah
    This document contains exhibits summarizing research and development (R&D) and advertising expenses and amortization schedules to calculate economic value added (EVA) for a dermatology division from 1999-2002. It also shows EVA bonus calculations for the divisional manager. Key details include: 1. R&D expenses are amortized over 5 years while advertising is amortized over 3 years for EVA calculations. 2. EVA was first introduced for the division in 2000. 1999 figures were calculated retroactively for target setting. 3. 2001-2002 figures were estimated using historical growth rates from 1999 - R&D at 17%, income at 18%, assets at 18%,

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    CASE Solution Vyaderm

    Uploaded by

    Ishan Shah
    3K views8 pages
    This document contains exhibits summarizing research and development (R&D) and advertising expenses and amortization schedules to calculate economic value added (EVA) for a dermatology division from 1999-2002. It also shows EVA bonus calculations for the divisional manager. Key details include: 1. R&D expenses are amortized over 5 years while advertising is amortized over 3 years for EVA calculations. 2. EVA was first introduced for the division in 2000. 1999 figures were calculated retroactively for target setting. 3. 2001-2002 figures were estimated using historical growth rates from 1999 - R&D at 17%, income at 18%, assets at 18%,

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    Vyaderm case solution

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    This document contains exhibits summarizing research and development (R&D) and advertising expenses and amortization schedules to calculate economic value added (EVA) for a dermatology division from 1999-2002. It also shows EVA bonus calculations for the divisional manager. Key details include: 1. R&D expenses are amortized over 5 years while advertising is amortized over 3 years for EVA calculations. 2. EVA was first introduced for the division in 2000. 1999 figures were calculated retroactively for target setting. 3. 2001-2002 figures were estimated using historical growth rates from 1999 - R&D at 17%, income at 18%, assets at 18%,

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    3K views8 pages

    CASE Solution Vyaderm

    Uploaded by

    Ishan Shah
    This document contains exhibits summarizing research and development (R&D) and advertising expenses and amortization schedules to calculate economic value added (EVA) for a dermatology division from 1999-2002. It also shows EVA bonus calculations for the divisional manager. Key details include: 1. R&D expenses are amortized over 5 years while advertising is amortized over 3 years for EVA calculations. 2. EVA was first introduced for the division in 2000. 1999 figures were calculated retroactively for target setting. 3. 2001-2002 figures were estimated using historical growth rates from 1999 - R&D at 17%, income at 18%, assets at 18%,

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 8
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    The key takeaways are that R&D and advertising expenses are amortized over multiple years for EVA calculation purposes, and the divisional manager's bonus is calculated based on EVA performance against targets.

    R&D is amortized over 5 years and the amortization amount is deducted from net operating profit to calculate EVA.

    Advertising is amortized over 3 years and the amortization amount is deducted from net operating profit to calculate EVA.

    Exhibit 1: Research & Development Amortization for EVA Calculation

    ($000s) 1995 1996 1997 1998 1999 2000 2001E 2002E


    R&D Expense as reported on P&L(5year
    Amortization Period) $10,673 $12,487 $14,610 $17,094 $20,000 $39,000 $27,378 $32,032
    1995 2,135 2,135 2,135 2,135 2,135
    1996 2,497 2,497 2,497 2,497 2,497
    1997 2,922 2,922 2,922 2,922 2,922
    1998 3,419 3,419 3,419 3,419 3,419
    1999 4,000 4,000 4,000 4,000
    2000 7,800 7,800 7,800
    2001 5,476 5,476
    2002 6,406
    R&D Amortization Under EVA 2,135 4,632 7,554 10,973 14,973 20,638 23,617 27,101
    Cumulative R&D Expense (P&L) 10,673 23,160 37,770 54,864 74,864 113,864 141,242 173,274
    Less:Cumulative Amortization(EVA) 2,135 6,767 14,321 25,294 40,267 60,905 84,522 111,623
    Capitalized R&D for EVA Calculation of capital $8,538 $16,393 $23,449 $29,570 $34,597 $52,959 $56,720 $61,651

    Notes:

    1995 R&D Expense included for purpose of


    1 calculating 1999 EVA only
    2 R&D grew at 17% p.a. from 1997 to 1999
    3 2001 estimated R&D of $27,378=$20,000 *(1.17) 2
    4 2002 estimated R&D of $32,032=$27,348*1.17
    Note: R&D amortization for a period of 05 years
    Exhibit -2 Consumer Advertising Schedule for EVA Calculation
    ($000s) 1998 1999 2000 2001E 2002E
    Advertising Expense as reported on P&L(3 Year
    Amortization Period) $41 $45 $50 $55 $61
    1996 11
    1997 13 13
    1998 14 14 14
    1999 15 15 15
    2000 17 17 17
    2001 18 18
    2002 20
    Advertising Amortization under EVA 38 42 46 50 55
    Cumulative Advertising Expense (P&L) 113 $158 $208 $263 $324
    Less: Cumulative Amortization(EVA) 73 115 161 211 266
    Capitalized Advertising for EVA Calculation of
    capital $40 $43 $47 $52 $58
    Note:
    1 Consumer advertising grew at 10% p.a. from 1997to 2000. Same rate used to estimate 2001 and 2002.

    Note: Consumer adverising for a period of 03 years


    Exhibit -3 EVA Calculation for Dermatology Division
    ($000s except bonus) 1999a 2000 2001Ec 2002Ec
    NOPAT:
    Net Income Before Tax $20,000 $51,000 $27,848 $32,861 Based on NI before Tax Growth rate
    Research & Development Expense 20,000 39,000 27,378 32,032
    1. R&D Adjustments (14,973) (20,638) (23,617) (27,101)
    Advertising Expense 45 50 55 61
    2. Advertising Adjustment (42) (46) (50) (55)
    3. Goodwill amortization 2,500 2,500 2,500 2,500
    Net Opearting Profit Before Taxes (NOPBT) 27,530 71,866 34,114 40,298
    Current Year's Income Tax Payments (7,875) (18,725) (10,622) (12,376) 10622 = (34115+2500)*0.35
    Net Operating Profit After Taxes (NOPAT) $19,655 $53,141 $23,492 $27,922

    CAPITAL: Net Income


    Net Opearing Assets (NOA) $110,000 $135,000 $153,164 $180,734
    1. Capitalized R & D 34,598 52,960 56,721 61,653 From Exhibit-1
    2. capitalized Advertising 43 47 52 58 From Exhibit-2
    3. Accumulated Goodwill Amortization 7,500 10,000 12,500 15,000 7500=2500*3 years
    Capital $152,141 $198,007 $222,437 $257,445

    Capital Charge (11%) (16,736) (21,781) (24,468) (28,319)

    Economic Value Added (EVA) $2,919 $31,360 ($976) ($397)

    Notes:

    a
    EVA was introduced in the Dermatology division for the first time in 2000. The EVA figure was
    calculated retroactively solely to set 2000 EVA targets. The 1999 EVA calculation includes the
    amortization of a 1995 R&D expense of $10,673.
    b
    Taxes = 35% of ( Net Income Before Tax + Goodwill Amortization). 0.35
    c
    2001 and 2002 estimated results obtained by forecasting four financial statement items at historical growth rates from 1999 base:
    net income before tax at 18%. R&D at 17%, consumer advertising at 10%, and net operating assets at 18%.
    For example, 2001 estimated NOA of $153,164 = $ 110,000 * (1.18) 2
    2002 estimated NOA of $ 180,734 = $ 153,164 * 1.18.

    Note: Goodwill not to be amortized.


    Growth rate

    (7875=20000+2500)*0.35 Refer Exhibit -8 Net income before tax


    10622=(20000*1.18*1.18+2500)*0.35
    12376=(20000*1.18*1.18*1.18+2500)*0.35
    Growth rate = 20000/16949=18%
    Exhibit -4 EVA Bonus Calculation for Divisional Manager
    ($000s except bonus) 1999 2000 2001E 2002E
    Old Model EVA Year 1 EVA Year 2 EVA Year 3
    Economic Value Added (EVA)a $2,920 $31,360 ($976) ($397)
    EVA Improvement Goal 2,150 2,150 2,150
    EVA Target b 5,070 33,510 1,174
    Interval 12,000 12,000 12,000

    Actual EVA Improvement $28,440 ($32,336) $579


    EVA Performance c
    319% -187% 87%

    North American Manager's Bonus: 2000 2001E 2002E


    Base Salary $200,000 $200,000 $200,000
    Target EVA Bonus (60% Base Salary) 120,000 120,000 120,000

    Starting Bank Balance -- 131,400 (93,000)


    1. Calculated Bonus d
    382,800 (224,400) 104,279
    New Bank Balance $382,800 ($93,000) $10,869

    Pay Out 100% of Available Target 120,000 -- 10,869


    Plus 50% Remaining bank Balance 131,400 -- --
    2. Total Bonus Payout $251,400 -- 10,869

    Ending Bank Balance $131,400 ($93,000) --

    Notes:

    a
    EVA was introduced in the Dermatology division for the first time in 2000. The 1999 EVA figure
    was calculated retroactively solely to set 2000 EVA targets. The 1999 EVA calculation includes the
    amortization of a 1995 R&D expense of $ 10.673.
    b
    EVA target = Prior Year's EVA + EVA improvement Goal for this year.
    For 2000, EVA Target of $5,070 = $2,920 + $2,150
    c
    EVA Performance (%) = 1 + [(Actual Improvement - Improvement Goal )/ EVA interval]
    For 2000, EVA performance of 319% = 1 + [ ( 31,360 - 2,920 - 2,150) / 12,000) ]
    d
    Calculated Bonus = Target Bonus X EVA Performance
    For 2000, calculated bonus of $ 382,897 = 319% X 120,000
    Given in Exhibit-8 page-15

    Given in Exhibit-8 page-15

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