> ## Documentation Index
> Fetch the complete documentation index at: https://valuation-101.com/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# R&D Converter

> Capitalize R&D expenses into a research asset, adjusting EBIT and invested capital for the DCF model.

## 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

1. Capitalize recent R\&D expenses over an amortization period (typically 3–5 years depending on industry)
2. Create a "research asset" = sum of unamortized R\&D
3. Adjust EBIT: add back current R\&D expense, subtract amortization of the research asset
4. Adjust invested capital: add the research asset to book value