Question

Youlett Packard Corporation (YPC) is a multinational computer hardware, software and services corporation. The company invests considerable amounts in research and development each year. In the most recent fiscal year 2012, the R&D expense was $1,020. The pre-tax operating income for YPC was $3,000m and the book value of capital was $5,000m. The R&D expenses for the prior 5 years are as follows: $950 (2011), $940 (2010), $930 (2009), $920 (2008), $910 (2007). The effective tax rate is 40%.

(a). Assuming an amortizable life of 5 years, determine the amortization of capitalised R&D in each of the previous 5 years .

(b). Determine the Value of Research Asset for YPC and the R&D amortization expense for the current year .

(c). Compute the Return on Capital (ROC) for YPC before and after capitalising the R&D expenses

Answer 1

(a) amortization of capitalised R&D in each of the previous 5 years

Year	R&D Exp.	Amortisation & Balance
		2007		2008		2009		2010		2011		2012
		Amortized	Balance	Amortized	Balance	Amortized	Balance	Amortized	Balance	Amortized	Balance	Amortized	Balance
2007	910	182	728	182	546	182	364	182	182	182	0	0	0
2008	920	0	0	184	736	184	552	184	368	184	184	184	0
2009	930	0	0	0	0	186	744	186	558	186	372	186	186
2010	940	0	0	0	0	0	0	188	752	188	564	188	376
2011	950	0	0	0	0	0	0	0	0	190	760	190	570
2012	1020	0	0	0	0	0	0	0	0	0	0	204	816
Total	5670	182	728	366	1282	552	1660	740	1860	930	1880	952	1948

Years	Amortised Amount
2007	182
2008	366
2009	552
2010	740
2011	930

(b)

• Value of Research Asset for YPC for Current Year = $ 1948
• R&D amortization expense for the Current Year = $ 952

(c) Return on Capital (ROC) for YPC before capitalising the R&D expenses =

PBIT $ 3000 M

(-) Tax $ 1200 M

PAT $ 1800 M

Now The ROC = 1800 / 5000 = 36%

After Capitalising the ROC ;

EBIT (1-t) + Amortised R&D Exp. / (BV of Capital+Research Assets)

i.e. (1800 + 952 ) / (5000 + 1948) * 100

i.e. 39.61 %