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Dear tutor,
For example if the research and development costs is $300 for year 1 & $200 for year 2 and the benefits obtained will last for 4 years. Then for the NOPAT calculation :
– Add back R&D cost of $300 to the operating profits of year 1 and $200 to the operating profits of year 2.
– Deduct from operating profit the amortization cost of $250($1000/4) per year from year 3 to year 6.
Please let me know if there are any mistakes.
Also, for the calculation of NOPAT, we only deduct amortization for expenses that we have incurred in earlier years right?
Thank you 🙂
I think your amortisation should be (300 +200)/4 = 125.
For NOPAT, usually amortisaton will not start until the project is completed, so you are correct.
Ken, i would also like to ask about the Capital Employed.
Using the same example above, the Capital Employed used for the calculation of EVA will be:
Y1:-
Y2: Add back $300
Y3: Add back $200
Y4-6: –I left Y1 ‘blank’ as Opening Capital Employed is used. However, I do feel a bit uncertain to leave Y4 to Y6 ‘blank’. Are there any mistakes in my answer?
Yr 3: you have to add back 500 to the unadjusted figure. If R&D had not been expensed, reserves at the start of Yr 3 would have been 500 higher. Similarly for Yr 4 etc. However, you are now amortising for so that charge would have to be deducted for year 4, 5, 6, 7 NOPAT.
Good that you remember to use opening NOPAT.
Thanks for your compliment 🙂
So the answer be like this?
Y1: –
Y2: Add back 300
Y3: Add back 500
Y4: Add back 375
Y5: Add back 250
Y6: Add back 125
Y7: –For Y2 and Y3, we add back 300 in Y2 and 500(200+300) in Y3.
For Y4 to Y7, the CE is being amortized so the amount is becoming less by each year.
Y4 etc you need to DEDUCT amortisation because that is no in the current FS. So, to get NOPAT deduct 125, 250, 375, 500 for Y4 on to mimic the effect of amortisation having been charged.
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