Youlett Packard Corporation (YPC) is a multinational computer hardware, software

Question

Youlett Packard Corporation (YPC) is a multinational computer hardware, software and services corporation. The company invests considerable amounts in research and development each year. In the most recent fiscal year 2012, the R&D expense was $1,020. The pre-tax operating income for YPC was $3,000m and the book value of capital was $5,000m. The R&D expenses for the prior 5 years are as follows: $950 (2011), $940 (2010), $930 (2009), $920 (2008), $910 (2007). The effective tax rate is 40%.

(a). Assuming an amortizable life of 5 years, determine the amortization of capitalised R&D in each of the previous 5 years (5 marks).

(b). Determine the Value of Research Asset for YPC and the R&D amortization expense for the current year (2 marks).

(c). Compute the Return on Capital (ROC) for YPC before and after capitalising the R&D expenses (3 marks)

Explanation / Answer

(a) amortization of capitalised R&D in each of the previous 5 years

(b)

(c) Return on Capital (ROC) for YPC before capitalising the R&D expenses =

PBIT $ 3000 M

(-) Tax $ 1200 M

PAT $ 1800 M

Now The ROC = 1800 / 5000 = 36%

After Capitalising the ROC ;

EBIT (1-t) + Amortised R&D Exp. / (BV of Capital+Research Assets)

i.e. (1800 + 952 ) / (5000 + 1948) * 100

i.e. 39.61 %

Year R&D Exp. Amortisation & Balance 2007 2008 2009 2010 2011 2012 Amortized Balance Amortized Balance Amortized Balance Amortized Balance Amortized Balance Amortized Balance 2007 910 182 728 182 546 182 364 182 182 182 0 0 0 2008 920 0 0 184 736 184 552 184 368 184 184 184 0 2009 930 0 0 0 0 186 744 186 558 186 372 186 186 2010 940 0 0 0 0 0 0 188 752 188 564 188 376 2011 950 0 0 0 0 0 0 0 0 190 760 190 570 2012 1020 0 0 0 0 0 0 0 0 0 0 204 816 Total 5670 182 728 366 1282 552 1660 740 1860 930 1880 952 1948

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