After tax salvage value Question

CFA Level II Corporate Finance
#1

In the Kaplan note Page 242 in the Corporate Finance book,

it mentions that “Year 4 NOPAT includes the after-tax gain from the sale” when calculating the ECONOMIC PROFIT And NOPAT = EBIT (1-tax rate).

However, when calculating the ECONOMIC INCOME, the after tax salvage value is an item added to the last year’s cash flow after EBIT.

Do you know why we need to add the “after tax salvage value” for economic income calulation while this is already included for the conomic profit calculation?

Thanks!

#2

Any one?

#3

Aren’t economic income and economic profit different concepts?

Indeed EP=NOPAT-$WACC, which is a valuation model.

EI is just an alternative to NPV method in project evaluation.

#4

I don’t know why, but it same like on the EOC curriculum no 33.

#5

Thanks! I guess I have to memorize the difference then under two concepts. Just dont like the same thing where one is added and the other is included already which is very easy to forget sometime.

#6

Yes, this is where I realized the difference. Really like the EOC questions where they show you all the major important pieces.