Vyaderm Pharmaceuticals Eva Calculation and Interpretation

Vyaderm Pharmaceuticals EVA Calculation and Interpretation

2000 EVA

The calculation of 2000 Economic Value Added (EVA) for the North American Dermatology Division included the adjustment on four accounts: research and development (R&D), consumer advertising, goodwill, and restructuring charges. R&D and advertising expenses were capitalized and amortized on a straight-line basis over five and three years, respectively. See Exhibit-1and Exhibit-2 for the detailed amortization schedules. Additionally, goodwill amortization entry was reversed. Moreover, restructuring expenses were removed from the profit statement and added back to net operating assets. Refer to Exhibit-3 and Exhibit-4 for the step-by-step calculations. The 2000 EVA was $31,360.60.

BONUS PAYOUT 2000

2000 EVA bonus payout for a manager earning $200,000.00 was $251,453.00. See Exhibit-5 for detailed calculations.

BONUS PAYOUT 2001

Vyaderm experienced an unusual profitable year in 2000. Assuming profits fell back to historical levels in 2001, data from 2000 was excluded when conducting 2001 prediction calculations. Exhibit-6 explained the regression analysis used in predicting data for 2001.

From 1996 to 1999, operating earnings, R&D expenses, advertising expenses and net operating assets had all shown strong correlation with the year of operation (Exhibit 6). Based on the regression models, operating earnings, R&D expenses, advertising expenses and net operating assets were predicted to be $24,994.60, $24,806.00, $52.10 and $137,473.00, respectively. The calculated bonus for 2001 was -$243,225.10. The negative bonus resulted in a $0.00 bonus payout for the year (Exhibit-5).

RECOMMENDATIONS

The current EVA model heavily relied on performance in previous