ModeldrillReturn on invested capital
A financial modeling exercise from Modeldrill. Solve it with a live spreadsheet grid in your browser, with Fill right and Fill down, and it is checked the moment you submit.
The task
Check whether growth creates value. Fill NOPAT (row 8: EBIT after tax at the rate in B2), the return on invested capital (row 9: NOPAT over the opening invested capital), the spread over the cost of capital in B3 (row 10) and economic profit (row 11: the spread times the opening invested capital).
What this exercise teaches
EBIT rises every year here, yet the return falls below the cost of capital because the capital base grows faster. Economic profit turns negative at that point: the business is bigger and worth less per dollar invested.
A hint if you get stuck
NOPAT is EBIT times one less the locked tax rate. Divide by the opening capital for the return, take off the locked cost of capital for the spread, and multiply the spread by the capital for economic profit.
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