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Q1
IN the question it says- “The only R & D spending identified in the last five years was $10m expensed during this year on a new product.
In the solution no adjustment has been done to the capital employed regarding this
but shouldn’t there have been an adjustment due to this, being previous year’s value-building expenditure?Q2)
Deferred tax provision:An increase in provisions should be added back to NOPAT.
My question is when we calculate cash taxes we adjust the increase in deferred tax provisions.
In addition to this; should we also add it back once again to the operating profit since it represents an increase in provision?CE for EVA is at the Start of the year. The 10m was spent during the year so does not need to be added back.
Operating profit is before tax, whether actual or deferred. The tax to be deducted for NOPAT is the tax paid (and an adjustment for lost tax relief on interest payments)
Thank you for the answer.
I might have not worded my Q2 properly, What I meant was
If there is an increase in deferred tax provision in the current year, just like any other increase in provision(allowance for doubtful debts) is added back to operating profit, this increase in deferred tax provision needs to be added back too?
Sorry yes.
See:
which includes:
“Items such as provisions, allowances for doubtful debts, deferred tax provisions and allowances for inventory should be added back to capital employed, since these represent over-prudence on the part of financial accountants, and this understates the true value of capital employed. Any expenses or income recognised in the income statement in respect of movements in such items should also be removed from NOPAT.”
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