Entering Data for Economic Profit Method Accounts

The Economic Profit (EP) method assumes that a company's value equals the amount of invested capital plus a premium equal to the present value of the economic profit in each forecast year. Economic Profit equals the spread between the rate of return on invested capital and the rate of return on required capital, multiplied by the invested capital.

See Valuation Theory.

  Entering Data for Economic Profit Method Accounts:

  1. Access Tax and Valuation Options.

    See About Tax and Valuation Options.

  2. Select EP.

  3. For Required Return on Capital, click Inputs and enter the account values.

    The Required Return on Capital is the discount rate used to determine the discount factor which is used to calculate the present value of economic profit. The rate should be entered as a percentage, not as a decimal.

  4. For Long Term Required Return, click Inputs and enter the account values.

    Enter the Long Term Required Return which is the rate used to discount the residual value of the economic profit. The rate should be entered as a percentage, not as a decimal.

  5. In Residual Value Tax Rate (%), enter a value.

    Enter the Residual Value Tax Rate which is applied during the years following the forecast period.

  6. In Residual NOPAT Adjustment, enter a value.

    Enter adjustments to NOPAT for the residual period.

  7. For NOPAT Adjustment, click Inputs and enter the account values.

    Enter adjustments to NOPAT.

  8. For Assets Adjustment, click Inputs and enter the account values.

    Enter the Asset Adjustment which is used to adjust Book Value.

  9. For Liabilities Adjustment, click Inputs and enter the account values.

    Enter the Liabilities Adjustment which is used to adjust Book Value.

  10. Click OK.