Continuing Value Using Economic Profit  289
Exhibit 14.2 shows how continuing value, calculated using the value driver 
formula, is affected by various combinations of growth rate and RONIC. The 
example assumes a $100 million base level of NOPAT and a 10 percent WACC. 
For RONIC near the cost of capital, there is little change in value as the growth 
changes. This is because the company is taking on projects whose net present 
value is close to zero. At an expected RONIC of 14 percent, however, chang-
ing the growth rate from 6 percent to 8 percent increases the continuing value 
by 50 percent, from about $1.4 billion to about $2.1 billion. The higher the 
RONIC, the more sensitive the continuing value is to changing growth rates.
Two-Stage Continuing-Value Models
For high-growth companies or companies undergoing long-term structural 
changes, we recommend extending the explicit forecast period until the com-
pany reaches a steady state. If the resulting model is too cumbersome, use a 
multistage continuing value that aggregates multiple years into a single for-
mula. In a two-stage model, the continuing value is split into a growth annuity 
followed by a growth perpetuity. This allows for distinct returns on capital 
and growth rates for different stages of the company’s life, without the burden 
of year-by-year forecasts. We provide two-stage continuing-value formulas 
for discounted cash flow and economic-profit models in Appendix I.
Continuing Value Using Economic Profit
To estimate continuing value in an economic-profit valuation, we again rely 
on perpetuity-based formulas. With the economic-profit approach, however, 
the continuing value does not equal the value of the company following the 
EXHIBIT 14.2  Impact of Continuing-Value Assumptions
WACC = 10%; NOPAT = $100 million
0
1,000
10
12
14
16
Return on new invested capital, %
Continuing value, $ million
18
Growth = 8%
Growth = 6%
Growth = 4%
20
2,000
3,000

290  Estimating Continuing Value 
explicit forecast period, as it does for discounted free cash flow. Instead, it is 
the incremental value over the company’s invested capital at the end of the 
explicit forecast period. Today’s value of the company is as follows:
Value0
=
Invested 
capital0
+
Present value of 
forecast economic 
profit during explicit 
forecast period
+
Present value of 
forecast economic 
profit after explicit 
forecast period
The continuing value is the last term in the preceding equation.
The formula to estimate continuing value using economic profit is 
more complicated than that for discounted cash flow. Unlike the key value 
driver formula used in an enterprise DCF model, the continuing value for 
economic profit contains two terms. The first term represents the present 
value of economic profits on capital in place at the end of the forecast 
period. The second term represents the present value of economic profits 
for annual investments beyond the explicit forecast period. The formula 
is as follows:
CV
IC
ROIC
WACC
WACC
PV Economic Profit
WACC
t
t
t
t
g
=
−
(
) +
(
)
−
+
+
1
2
where
PV Economic Profit
NOPAT
RONIC
RONIC
WACC
WACC
t
t
g
+
+
(
) =




−
(
)
2
1
where
    ICt = invested capital at the end of the explicit forecast period
ROICt = ROIC on existing capital at the end of the explicit forecast 
period, measured as NOPATt+1/ICt
WACC = weighted average cost of capital
g = expected growth rate in NOPAT in perpetuity
RONIC = expected rate of return on new invested capital after the 
explicit forecast period
According to the formula, total economic profit following the explicit 
forecast period equals the present value of economic profit in the first year 
after the explicit forecast in perpetuity plus any incremental economic profit 
after that year. Incremental economic profit is created by additional growth 
at returns exceeding the cost of capital. If expected RONIC equals WACC, 
the third term (economic profits beyond year 1) equals zero, and the continu-
ing economic-profit value is the value of just the first year’s economic profit 
in perpetuity.