Adjustments

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R&D capitalization: lib/rd_converter.py

Capitalizes R&D expenses from operating expenses into a research asset, adjusting EBIT and invested capital. This is Damodaran’s standard treatment for companies where R&D is a true investment rather than a recurring cost.

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capitalize_rd()

Parameters:

• rd_expenses — list of R&D expenses by year (most recent first, typically 3–10 years)
• amortization_life — useful life of R&D in years (looked up by industry, typically 2–10 years)
• tax_rate — marginal tax rate

Returns:

• research_asset — capitalized value of unamortized R&D
• amortization — current year’s amortization expense
• ebit_adjustment — add back R&D, subtract amortization (net effect on EBIT)
• tax_benefit — tax shield on the R&D adjustment

Data source: rd_amortization_by_industry.json provides the amortization life by Damodaran industry classification.

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Operating lease conversion: lib/lease_converter.py

Converts operating lease commitments into a debt equivalent by computing the present value of future lease payments, then adjusts debt, EBIT, and invested capital accordingly.

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convert_operating_leases()

Parameters:

• lease_commitments — future lease payments by year (years 1–5 + beyond year 5)
• lease_expense — current year’s operating lease expense
• pretax_cost_of_debt — discount rate for lease obligations

Returns:

• debt_value — present value of lease commitments (added to debt)
• depreciation — implied depreciation on the lease asset
• ebit_adjustment — add back lease expense, subtract depreciation (net effect on EBIT)
• asset_value — right-of-use asset to add to invested capital