Messing up Economic Income and Economic Profit

[tau281290]

What is a nice and quick way to remember these two formulas/concepts and stop messing them up?

[krokodilizm]

Economic profit = NOPAT-$WACC = EBIT(1-t)-$WACC= EVA

Economic income is a mess. It is more like an algorithm than a formula.

You can write it as EI= after tax cash flow +change in project’s market value

But watch what this means. AT cash flow =(S-C-D)(1-t)+D and change in market value is projects year end MV (or next year’s opening MV) minus opening balance. So the full formula looks like this

(S-C-D)(1-t)+D+(Y2 opening MV - Y1 opening MV)

Have a look at Table 29 Reading 23 and you will visualize it better.

[abeshak_sindhi]

@krokodilizm

Economic profit = NOPAT-$WACC = EBIT(1-t)-$WACC= EVA

Economic income is a mess. It is more like an algorithm than a formula.

You can write it as EI= after tax cash flow +change in project’s market value

But watch what this means. AT cash flow =(S-C-D)(1-t)+D and change in market value is projects year end MV (or next year’s opening MV) minus opening balance. So the full formula looks like this

(S-C-D)(1-t)+D+(Y2 opening MV - Y1 opening MV)

Have a look at Table 29 Reading 23 and you will visualize it better.

just wanted to ask in economic profit formula the $wacc means wacc * total assets? Total assets at the starting of the year?

[krokodilizm]

@abeshak_sindhi

@krokodilizm

Economic profit = NOPAT-$WACC = EBIT(1-t)-$WACC= EVA

Economic income is a mess. It is more like an algorithm than a formula.

You can write it as EI= after tax cash flow +change in project’s market value

But watch what this means. AT cash flow =(S-C-D)(1-t)+D and change in market value is projects year end MV (or next year’s opening MV) minus opening balance. So the full formula looks like this

(S-C-D)(1-t)+D+(Y2 opening MV - Y1 opening MV)

Have a look at Table 29 Reading 23 and you will visualize it better.

just wanted to ask in economic profit formula the $wacc means wacc * total assets? Total assets at the starting of the year?

Yes. Sometimes called total capitalization, sometimes called invested capital etc and every time the balance sheet may be given differently. I have a comprehensive formula up my white board at home, I will share later today. I swear these type of questions trip me more than the most difficult swap valuation out there…

[abeshak_sindhi]

@krokodilizm

@abeshak_sindhi

@krokodilizm

Economic profit = NOPAT-$WACC = EBIT(1-t)-$WACC= EVA

Economic income is a mess. It is more like an algorithm than a formula.

You can write it as EI= after tax cash flow +change in project’s market value

But watch what this means. AT cash flow =(S-C-D)(1-t)+D and change in market value is projects year end MV (or next year’s opening MV) minus opening balance. So the full formula looks like this

(S-C-D)(1-t)+D+(Y2 opening MV - Y1 opening MV)

Have a look at Table 29 Reading 23 and you will visualize it better.

just wanted to ask in economic profit formula the $wacc means wacc * total assets? Total assets at the starting of the year?

Yes. Sometimes called total capitalization, sometimes called invested capital etc and every time the balance sheet may be given differently. I have a comprehensive formula up my white board at home, I will share later today. I swear these type of questions trip me more than the most difficult swap valuation out there…

Yup I totally agree.cfa institute does a poor job in giving one straight formula for it.same goes for roic and roce denominator.

[biuku]

• P --> Profit

• P --> NOPAT

• I --> Income

• I --> I don’t think I care

[tau281290]

@biuku

• P --> Profit

• P --> NOPAT

• I --> Income

• I --> I don’t think I care

Good. I can’t believe I messed it up while doing a vignette.