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Hi sir,
I would like to ask for the Sep/Dec 2019 Q1 ii) related to the calculation of EVA, the appendix states that “This year and each year for the previous 10 years, economic depreciation has included a $10m write down of the value of brand building”.My question is — why isn’t the 10m added back to the operating profit to arrive NOPAT and $100m added back to the capital employed? (The only relevant calculation related to this item in the answer is deducting $100m from capital employed)
Thank you!Depreciation and amortisation are not adjustments that need to be made to the capital employed, that’s why you don’t add it back. As for why you deduct it I wasn’t 100% sure myself (I actually did this question this morning and also missed that point) but I believe it’s because you are trying to calculate the Capital Employed at the start of the year and so you have to include the amortisation which has been previously expensed by deducting it from the capital employed.
ddmoo is incorrect. Historical book depreciation potentially needs to be replaced by historical economic depreciation, but we do not have that information here.
Historical R&D expensed needs to be be added to CE – hence 900 added, then 100 deducted (10 x $10m). The current year’s amortisation of R&D needs to be deducted from NOPAT, but note 6 tells us that the economic depreciation of 1907 contains the 10 write down of the value of brand-building, so it does not have to be deducted again.
Ohhh it’s related to amortisation! Got it!
Had a hard time trying to figure this out.
Thanks for the prompt reply 🙂Yeah my answer actually makes no sense looking back at it. Thanks for the help.
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