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Dear Sirs,
In the above mentioned article, example 3 there are adjustments made for the EVA calculation with regard to $1.5m research and development costs incurred over two years for Project X (Ref. point 3.)
In order to arrive at NOPAT the operating profit has been adjusted by ($750k) in each year. However, the capital employed was adjusted by ($1.5m) in the first year and ($750k) in the second.
I don’t understand how the total amount amortised can be greater than the original cost incurred, so if the total of $1.5m was added back to CE in the first year, why is there another $750k in the second year deducted? Can you please explain?
Thank you and kind regards
It’s because EVA uses the OPENING capital employed.
So, if project X had always been capitalised, the CE at the start of 2009 would have been 1,500 greater. 750 would be amortised in the income statement for 2009. The next year’s CE for EVA would show have to add just 750 to the opening CE and would also have amortisation of 750 in the income statement.
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