Question

Husker FinTech is a firm with significant R&D expenses. In the most recent year, the firm had $420 million in operating income, $300 million in R&D, and ended the year with $3.2 billion in book capital. You believe R&D expenses are amortizable over 5 years, and over the past 6 years they are:

Year                       R&D Amount

-5                            $150 million

-4                            $180 million

-3                            $210 million

-2                            $240 million

-1                            $270 million       

0                             $300 million

For simplicity, assume expenses occur at the end of the year. Calculate a) adjusted operating income and b) adjusted book capital.

Answer 1

a)Calculation of Adjusted Operating Income

Particulars	Amount(in million)
Operating Income	420
Less: R& D Expenses
Year 0: 300	0
Year 1 : 270 (270/5)	54
Year 2: 240 (240/5)	48
Year 3: 210 ( 210/5)	42
Year 4 : 180 (180/5)	36
Year 5: 150 (150/5)	30
Year 6: 300 (300/5)	60
Net Income	150

Year 0 amount has not been deducted as 5 years has elapsed.

b)Calculation of Adjusted Book Capital

Particulars	Amount (in billions)
Book Capital	3.2
Add: Current Year Profit	0.15
Total	3.35