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Homework Exercise. Sarah Weatherburn. R&D Revenues. R&D Expenditures Expenses. R&D Revenues - Capitalized. R&D expenditures Capitalized. Differences. Residual Income is higher when R&D expenses are capitalized. Income increases at a quicker rate Expenses are much lower. 2020 Forecast.
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Homework Exercise Sarah Weatherburn
Differences • Residual Income is higher when R&D expenses are capitalized. • Income increases at a quicker rate • Expenses are much lower
2020 Forecast Expensed Capitalized
Differences • 20 million difference in income • R&D capitalization allows higher income through lower expenses.
Differences • Valuation is lower when R&D is capitalized? • Should valuation change? Accounting changes should not affect valuation…. • Are my calculations wrong?
Forecast til only 2016? • Reach steady state? • Not enough information to make an informed valuation
Which is more Profitable? • 5 year seems to be more profitable in 2017 • Why? Expenses are more spread out causing less impact on income
Higher Earnings = Higher Value? • NEA is the anchor – accounting changes do not necessarily affect the intrinsic value of the company
Which is better? • 5 year depreciation yields higher profits overall • Depreciation expense is more spread out.