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Analysis of Valuation Models: GAAP vs. Capitalization

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This analysis explores the differences between GAAP and capitalization models in valuing expenses and earnings. We observe that higher early expenses in the GAAP model can lead to variations in essential metrics such as NEA and RNEA. The depreciation across 3-year and 5-year models also plays a critical role in understanding the financial outcomes, with the latter showing lower depreciation and consequently higher earnings in 2017. Despite these differences, the intrinsic value remains stable, providing insight into PPE investment and long-term financial health.

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Analysis of Valuation Models: GAAP vs. Capitalization

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  1. Valuations Homework Brian Gitschier

  2. 1. a)

  3. 1. b)

  4. 1. c) • Higher expense early in GAAP model • Higher NEA in capitalization model • Higher RNEA and REI in capitalization model early on (reverses)

  5. 1. d) • GAAP • Capitalization

  6. 1. e) - GAAP

  7. 1. e) - Capitalization

  8. 1. f) • Would not have reached stable state • Same sales and other expenses • Different R&D expense and NEA

  9. 1. g)

  10. 2. a) – 3 Year Depreciation

  11. 2. a) – 5 Year Depreciation

  12. 2. b) • Lower Depreciation expense in 5-year model • Same sales and other expense • Higher Earnings in 2017

  13. 2. c) – 3 Year

  14. 2. c) – 5 Year

  15. 2. d) • Same sales • Same non-depreciation expenses • Depreciation will eventually even out • Same intrinsic value

  16. 2. e) • Stable PPE investment after 2018 • Same depreciation expense in both models • Same sales and expenses • Same EPAT

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