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R&D cost of Project X and Z.
Understood it has added back into profit
Project- Z is not completed or say not ready for sale yet so no amortisation required.
Project -X in 2008 completed and ready for sale in year 2009 begining for 2 years life span.
So amortised in year 2009 and 2010.
( just for a clarity if we were calculating 2008 figures only yearly expense amount would be added back?)
Secondly I am not getting why 500 expense of Project Z taken in year 2010 only( capital employed fig)?
Could you please explain what is a difference of two projects R&D to consider in calculating Capital Employment. What values to be taken?
In EVA the Capital employed is the OPENING capital employed.
2009, no amortisation has happened at 1Jan so all 1500 added back.
2010, half amortised at 1 Jan so 750 added back.
NOPAT in both years bears 750 cost.
R&D was written off as incurred, but EVA says this should be capitalised and amortisation started when the project begins to be used (which it hasn’t as it is not finished). So, 500 must be added back to each year’s NOPAT. No amount has to be added to 2009 CE because opening CE is not affected by the 500 cost in 2009. The 2009 cost has, however, to be added back to the 2010 CE because that (opening amount) would be 500 higher without the 2009 cost.
I am sorry… I am not confident that I percieved it correctly ..can you explain following point differently please. ?
” because opening CE is not affected by the 500 cost in 2009. The 2009 cost has, however, to be added back to the 2010 CE because that (opening amount) would be 500 higher without the 2009 cost.”
The 500 charged in 2009 does not affect the CE at 1/1/2009.
The 500 charged in 2009 and does affect the CE at 1/1/2010, so must be added back as EVA says R&D should be capitalised.