Question

help!

Value Creation Example Company 1 Revenue NOPAT Net Investment Free Cash Flow Year 1 1000.00 100.00 25.00 75.00 Year 2 1050.00 105.00 26.25 78.75 Year 3 1102.00 110.25 27.56 82.69 Year 4 1158.00 115.76 28.94 86.82 Year 5 1216.00 121.55 30.39 91.16 Company 2 Revenue NOPAT Net Investment Free Cash Flow Year 1 1000.00 100.00 50.00 50.00 Year 2 1050.00 105.00 52.50 52.50 Year 3 1102.00 110.25 55.13 55.13 Year 4 1158.00 115.76 57.88 57.88 Year 5 1216.00 121.55 60.78 60.78

Answer 1

G = Growth in revenue is calculated as the growth in Year 2 revenue over Year 1 revenue and so on.

ROIC= NOPAT/Net Investment

Value at the end of every year is the sum of all Present value of cash flows to that year.

Change in Value is the change in Value at the end of Year 2 over Year 1 and so on.

The calculation is as follows:

Company 1	Year 1	Year 2	Year 3	Year 4	Year 5
Revenue	1,000.00	1,050.00	1,102.00	1,158.00	1,216.00
NOPAT	100.00	105.00	110.25	115.76	121.55
Net investment	25.00	26.25	27.56	28.94	30.39
Free cashflow	75.00	78.75	82.69	86.82	91.16
WACC	10%	10%	10%	10%	10%
g		5%	5%	5%	5%
ROIC	400%	400%	400%	400%	400%
PV of Cashflow	25	23.86	22.78	21.74	20.76
Value using KDF	25	48.86	71.64	93.38	114.14
Change in Value		95%	47%	30%	22%
Company 2	Year 1	Year 2	Year 3	Year 4	Year 5
Revenue	1,000.00	1,050.00	1,102.00	1,158.00	1,216.00
NOPAT	100.00	105.00	110.25	115.76	121.55
Net investment	50.00	52.50	55.13	57.88	60.78
Free cashflow	50.00	52.50	55.13	57.88	60.78
WACC		10%	10%	10%	10%
g		5.0%	5.0%	5.0%	5.0%
IR
ROIC	200%	200%	200%	200%	200%
PV of Cashflow	50	47.73	45.56	43.49	41.51
Value using KDF	50	97.73	143.29	186.78	228.29
Change in Value		95%	47%	30%	22%