1 / 21

R&D Capitalization vs. Expensing: Impacts on Income and Valuation

This analysis explores the financial implications of capitalizing versus expensing R&D expenditures. It highlights that capitalizing R&D can lead to higher residual income and lower expenses, facilitating faster income growth. A significant income difference of $20 million is noted due to capitalization. Moreover, the valuation of R&D differs significantly based on accounting methods; while capitalizing may initially show lower valuation, it could increase intrinsic value in practice. The report also compares 3-year versus 5-year depreciation, emphasizing the long-term profitability implications.

talen
Télécharger la présentation

R&D Capitalization vs. Expensing: Impacts on Income and Valuation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  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.

More Related