Corporate Finance - Economic profit Q

CFA Level II Corporate Finance
#1

Hi Guys

When we calculate economic profit as NOPAT - $WACC, in arriving at the total capital figure to multiply with WACC, do we always subtract depreciation from total capital?

Is total capital then; investment - accumulated depreciation?

Thanks

PD

#2

I believe so, at least this is how Schweser shows it. I tried to cross check this with the CFA curriculum but there does not appear to be any examples or EOCs where depreciation is explicitly mentioned. Presumably in the CFA example they have already factored depreciation into the initial investment. I would be interested to see what anyone else has to say on this.

#3

The short answer is yes you do.

Since the formula is NOPAT - (Wacc x Beginning Capital), you have to work out your beginning capital for each period.

It’s specifically (Assets - Depreciation) … There is question on this in the corporate finance EOC questions in the curriculum.