1 / 19

Homework Exercise

Homework Exercise. Paula Casini. Question 1: Accounting for R&D. Part A) Income, RNEA, REI. Total Revenue = $1.60 per dollar of expenditure on R&D for each of the subsequent five years Other Expenses = 80% of revenue RNEA = Net Income / Average Assets

marc
Download Presentation

Homework Exercise

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 Paula Casini

  2. Question 1: Accounting for R&D

  3. Part A) Income, RNEA, REI Total Revenue = $1.60 per dollar of expenditure on R&D for each of the subsequent five years Other Expenses = 80% of revenue RNEA = Net Income / Average Assets REI = Net Income in current year less the product of the RRR and assets in prior year

  4. Part B) Capitalized R&D Capitalized R&D = $100 expense per year is expensed over five years ($20 per year)

  5. Part C) Comparison • Different because the capitalization of R&D changes total assets (NEA) which is used to calculate both RNEA and REI • Increased NEA under capitalization increases both RNEA and REI

  6. Part D) Forecasts • Assumed another $100 was spent on R&D in 2020 so forecast for 2020 is the steady state • Different net operating assets due to capitalization result in the different values between the two methods

  7. Part E) Valuation

  8. Part E) Analysis • Two methods result in same valuation • Accounting methods used do not impact the valuation model

  9. Part F) Forecast only to 2016 • Hard to determine an enterprise value because it hasn’t reached steady state • Sales are not growing at a constant rate until after 2017

  10. Part G) Cut Expenditures

  11. Part G) Cut Expenditures • RNEA is higher even though sales are growing at a slower rate • Total expenses are decreasing at a faster rate than revenue is decreasing • Impacts enterprise impact, which drives the change in RNEA

  12. Question 2: Depreciation Methods

  13. Part A) Depreciation 3 Years

  14. Part A) Depreciation 5 Years

  15. Part B) Which is more profitable in 2017? • More profitable under three year depreciation • Results in higher EPAT • Large initial investment of $600 has been completely depreciated • Only $100 addition is being depreciated each year • Under five year depreciation, the $600 is still being depreciated along with the $100 additions

  16. Part C) Valuation

  17. Part D) Response to Founders • Different accounting methods do not impact the value of the firm • PV of free cash flow (which drives value) is the same for each year regardless of the depreciation method

  18. Part E) Valuation at 2022

  19. Part E) Justification of one method over the other • There is no justification • EPAT is the same in 2022 regardless of which depreciation method used • Value of the firm in 2022 will be the same regardless of which depreciation method used

More Related