Calculating Pre-Tax Return on Capital for Livewire Inc.

What is the pre-tax return on capital for Livewire Inc?

a. 2.17%
b. 5.00%
c. -10.87%
d. 43.48%
e. None of the above

Answer:

After capitalizing R&D expenses and adjusting for operating income and invested capital, Livewire Inc. has a pre-tax return on capital of 2.63%, which is not found in the given options. So, the answer is (e) None of the above.

The subject at hand deals with calculating the pre-tax return on capital for Livewire Inc. To begin, we need to make the adjustment for the R&D expenses. By capitalizing the R&D expenses, we amortize them over the period in which they generate profits, which is three years in this case. The total R&D expenses for the last three years are $24 million, $18 million, and $12 million, for a total of $54 million. Because these costs pay off over three years, each year we recognize a third, or $18 million. The adjusted operating income becomes $10 million loss + $30 million - $18 million = $2 million. The invested capital amount would also need to be adjusted by adding the unamortized R&D (2/3 of $54 million = $36 million) to the current measure of $40 million, which gives an invested capital of $76 million. Hence, the pre-tax return on capital is calculated as: (Adjusted operating income / Adjusted invested capital) = ($2 million / $76 million) x 100% = 2.63%, which is not available in any of the given options, so the answer would be (e) None of the above.