What it does
Treats R&D spending as investment rather than operating expense. This is Damodaran’s standard adjustment for companies with material R&D — it increases reported EBIT (and invested capital) to better reflect the company’s true earning power and asset base.When to use
Auto-detected in Feeling Lucky mode when R&D exceeds 5% of revenue. In Expert mode, the user decides.The adjustment
- Capitalize recent R&D expenses over an amortization period (typically 3–5 years depending on industry)
- Create a “research asset” = sum of unamortized R&D
- Adjust EBIT: add back current R&D expense, subtract amortization of the research asset
- Adjust invested capital: add the research asset to book value