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Homework Exercise

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

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  1. Homework Exercise Sarah Weatherburn

  2. R&D Revenues

  3. R&D Expenditures Expenses

  4. R&D Revenues - Capitalized

  5. R&D expenditures Capitalized

  6. Differences • Residual Income is higher when R&D expenses are capitalized. • Income increases at a quicker rate • Expenses are much lower

  7. 2020 Forecast Expensed Capitalized

  8. Differences • 20 million difference in income • R&D capitalization allows higher income through lower expenses.

  9. Valuation – R&D Expensed

  10. Valuation – R&D Capitalized

  11. Differences • Valuation is lower when R&D is capitalized? • Should valuation change? Accounting changes should not affect valuation…. • Are my calculations wrong?

  12. Forecast til only 2016? • Reach steady state? • Not enough information to make an informed valuation

  13. Cutting R&D expenditures

  14. PROBLEM #2

  15. 3 year Depreciation

  16. 5 year Depreciation

  17. Which is more Profitable? • 5 year seems to be more profitable in 2017 • Why? Expenses are more spread out causing less impact on income

  18. 3-year Depreciation Valuation

  19. 5-year Depreciation Valuation

  20. Higher Earnings = Higher Value? • NEA is the anchor – accounting changes do not necessarily affect the intrinsic value of the company

  21. Which is better? • 5 year depreciation yields higher profits overall • Depreciation expense is more spread out.

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