I don’t understand why we need to make these adjustments when calculating NOPAT: 1. Capitalize and amortize R&D charges and add them back 2. Add back charges of strategic investments aren’t these costs that the shareholder’s should assume?
The idea is that you are figuring out the income from continuing operations. Profits from R and D and strategic investments are theoretically realized over time. However, if those charges are expected to ring the register mainly within the fiscal year then they should be expensed from NOPAT.
and we only “capitalize” goodwill, right?
Think of NOPAT as being most applicable to EVA, which was designed to measure management’s effectiveness and align their behaviors with the interest of the shareholders. If R&D costs that would benefit the future years were not added back (ie expensed in the year incurred) the “rational” choice of management that was being evaluated based on EVA would be to incur no expenses that wouldnt have a benefit in the current period. All just my inference, but it helps me to understand the why when memorizing the what