Discounted Economic Profit Valuation Method

Description
Enterprise Discounted Cash Flows is widely used by practitioners as a valuation method, but analyzing a company's yearly free cash flow alone can be insufficient to draw conclusions about its economic performance and value creation. To gain deeper insight, it is recommended to complement the Enterprise DCF with the Economic Profit valuation method, which compares the company's weighted average cost of capital (WACC) to its return on invested capital to quantify value creation in each period. If the economic profit is positive, the company is creating value, and if it's negative, the company is destroying value.
When properly applied, both methods should yield consistent results.
Note:
This model uses both Enterprise DCF and Discounted Economic Profit methods to value a company's operations, it is mainly about showing the mechanics of each valuation method. It is important to note that the model only provides simplified projections and assumptions. In practice, changes in one assumption are likely to affect other assumptions. For example, if the EBITA margin is changed, the reinvestment rate is likely to change as well, changing the cost of capital assumptions should also have an impact on the capital structure (see the APV model) etc.