Reviewingthenumbersagain,CiscohadanR&Dexpenseof
$3,320 million in the fiscal year ended July 2005.
CapitalizingtheR&Dexpenses,usinganamortizablelifeof
fiveyears, yieldsa value for theresearch asset of $9,918
millionand an amortizationforthecurrent yearof $3,280
million. In addition, notethat Cisco reported conventional
capital expenditures of $863 million and depreciation and
amortizationamountingto$1,009million.Theadjustmentsto
capitalexpenditures, depreciationand amortization,and net
capital expenditures are:
The increase in net capital expenditure of $40 million is
exactlyequalto theincreasein after-taxoperatingincome.
CapitalizingR&Dthushasnoeffectonthefreecashflowto
thefirm.Sowhybother?Thoughthebottom-linecashflow
does not change, the capitalization of R&D changes the
estimates of earnings and reinvestment. Thus, it helps us
betterunderstandhowprofitableafirmisandhowmuchitis
reinvesting for future growth.
Acquisitions
Inestimatingcapitalexpenditures,weshouldnotdistinguish
betweeninternalinvestments(whichareusuallycategorized
ascapitalexpendituresincashflowstatements)andexternal
investments (which are acquisitions). The capital