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R&D Accounting

R&D Accounting. Ewa Nelip. Problem 1. Expensing vs. Capitalizing Enterprise Income. RNEA. Expensing R&D. Capitalizing R&D. When we expense R&D RNEA is negative in the first 3 years. It gradually increases from -85% to 75%

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R&D Accounting

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  1. R&D Accounting Ewa Nelip

  2. Problem 1

  3. Expensing vs. Capitalizing Enterprise Income

  4. RNEA Expensing R&D Capitalizing R&D • When we expense R&D RNEA is negative in the first 3 years. It gradually increases from -85% to 75% • When we capitalize it, it is positive throughout all the years. The range is a lot smaller, it goes from 5.45% to 15.79% • The changes are due to differences in the net operating assets

  5. Valuation – Expensing R&D

  6. Valuation – Capitalizing R&D

  7. Differences in Valuation • The value of the firm is the same (334) under both accounting methods • The present value of the sum of residual income is negative under expensing method and slightly positive if we capitalize R&D • Under capitalization the continuing value constitutes most of the firm value. • If we tried to value this firm by forecasting only to 2016 our valuation would be distorted as we have not reached a steady state in both cases. Moreover, the residual income is still negative for the expensing method.

  8. Valuation with Lower R&D

  9. Problem 2

  10. 3- versus 5-year Depreciation • In 2017 company looks more profitable under the 3-year depreciation. The EPAT is 1,189 compared to 1,109 if we expect the assets to have 5 years estimated useful life.

  11. Intrinsic Value of the Firm with 3-year Estimated Assets Life

  12. Intrinsic Value of the Firm with 5-year Estimated Assets Life

  13. Questions?

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