# 28. Management incentives and accounting for research and development. The Symantek Division...

28.    Management incentives and accounting for research and development. The Symantek Division produces software. It has $300,000 of total assets, earns$45,000 per year, and generates $45,000 per year of cash flow. The cost of capital is 15 percent. Each year, Symantek pays cash of$45,000 to its parent company, Microsot, Inc. Symantek’s man- agement has discovered a project requiring research and development costs now that will lead to new products. The anticipated cash flows for this project follow: beginning of Year 1, outflow of $24,000; beginning of Years 2, 3, and 4, inflows of$10,000 each.

Assume that Microsot undertakes the project, that cash flows are as planned, and Symantek pays $45,000 to Microsot at the end of the first year and$47,000 at the end of each of the next three  years.

a.    Compute Symantek’s rate of return on assets for each year of the project, assuming that accounting expenses R&D expenditures as they occur. Use the year-end balance of total assets in the denominator.

b.    Compute Symantek’s rate of return on assets for each year of the project, assuming that accounting capitalizes and then amortizes R&D costs on a straight-line basis over the last three years of the project. Use the year-end balance of total assets in the denominator.

c.    Compute the new project’s accounting rate of return, independent of the other assets and of the income of Symantek, assuming that accounting capitalizes and then amortizes R&D costs on a straight-line basis over the entire four years of the project.

d.    How well has the management of the Symantek Division carried out its responsibility to its owners? On what basis do you make this judgment?
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