857
EXHIBIT H.17  Costco: ROIC and Economic Profit
$ million, except where noted
Historical
Forecast
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
CV
Method 1
Return on invested capital,1 %
16.8
17.0
14.9
17.7
21.0
22.1
22.1
22.7
22.4
22.4
22.4
22.2
22.1
22.0
21.9
22.0
Weighted average cost of capital, %
(6.5)
(6.3)
(5.5)
(6.4)
(7.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
(8.0)
Economic spread, %
10.4
10.7
9.4
11.3
14.0
14.1
14.1
14.7
14.4
14.4
14.4
14.2
14.1
14.0
13.9
14.0
× Invested capital1
14,941
15,253
17,928
17,506
18,151
18,997
20,806
22,213
23,651
25,073
26,476
27,854
29,202
30,516
31,793
33,065
Economic profit
1,549
1,639
1,682
1,978
2,541
2,685
2,928
3,259
3,405
3,602
3,810
3,950
4,114
4,272
4,433
4,615
Method 2
Invested capital1
14,941
15,253
17,928
17,506
18,151
18,997
20,806
22,213
23,651
25,073
26,476
27,854
29,202
30,516
31,793
33,065
× Weighted average cost of capital, %
6.5%
6.3%
5.5%
6.4%
7.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
Capital charge
964
959
993
1,120
1,277
1,521
1,665
1,778
1,893
2,007
2,119
2,230
2,338
2,443
2,545
2,647
NOPAT
2,513
2,598
2,675
3,098
3,818
4,206
4,593
5,037
5,298
5,609
5,929
6,180
6,451
6,715
6,978
7,262
Capital charge
(964)
(959)
(993)
(1,120)
(1,277)
(1,521)
(1,665)
(1,778)
(1,893)
(2,007)
(2,119)
(2,230)
(2,338)
(2,443)
(2,545)
(2,647)
Economic profit
1,549
1,639
1,682
1,978
2,541
2,685
2,928
3,259
3,405
3,602
3,810
3,950
4,114
4,272
4,433
4,615
1 Invested capital measured at the beginning of the year.

858  Appendix H
EXHIBIT H.18  Costco: Valuation Using Economic Profit
$ million, except where noted
Forecast year
Invested 
capital1
ROIC,1 
%
WACC, 
%
Economic 
profit
Discount 
factor 
at 8.0%
Present value 
of economic 
profit
2020
18,997
22.1
8.0
2,685
0.926
2,486
2021
20,806
22.1
8.0
2,928
0.857
2,510
2022
22,213
22.7
8.0
3,259
0.794
2,587
2023
23,651
22.4
8.0
3,405
0.735
2,502
2024
25,073
22.4
8.0
3,602
0.680
2,451
2025
26,476
22.4
8.0
3,810
0.630
2,400
2026
27,854
22.2
8.0
3,950
0.583
2,304
2027
29,202
22.1
8.0
4,114
0.540
2,222
2028
30,516
22.0
8.0
4,272
0.500
2,136
2029
31,793
21.9
8.0
4,433
0.463
2,052
Continuing value
115,237
0.463
53,354
Present value of economic profit
77,005
Invested capital in 2019
18,997
Invested capital and economic profit
96,002
Midyear adjustment factor
1.039
Value of operations
99,770
Value of excess cash
6,390
Value of foreign tax credit carryforward
65
Enterprise value
106,225
Less: Value of debt and capital leases
(7,244)
Less: Value of capitalized operating leases
(2,414)
Less: Value of noncontrolling interests
(341)
Equity value
96,226
1 Invested capital measured at the beginning of the year.

859
Appendix I
Two-Stage Formula for 
Continuing Value
In certain situations, you may want to break up the continuing-value (CV) 
period into two periods with different assumptions for growth and return on 
invested capital (ROIC). In a situation such as this, you can use a two-stage 
variation of the value driver formula for discounted cash flow (DCF) valua-
tions. The first stage is based on a limited-life annuity formula, and the second 
stage is based on a perpetuity:
CV
Annuity Stage
Perpetuity Stage
=
+
such that
Annuity Stage
NOPAT
RONIC
WACC
=
−




−














+
t
A
A
A
g
g
1 1
1
1
1
1
1
−
+
+












=
+
×
gA
N
N
WACC
Perpetuity Stage
WACC
NOP
(
)
AT
RONIC
WACC
t
A
N
B
B
B
g
g
g
+
+
−




−
(
)
1 1
1
(
)
where  NOPAT = net operating profit after taxes
gA = expected growth rate in the first stage of the CV period
RONICA = expected return on new invested capital during the first 
stage of the CV period
WACC = weighted average cost of capital
N = number of years in the first stage of the CV period
gB = expected growth rate in the second stage of the CV period
RONICB = expected return on new invested capital during the second 
stage of the CV period

860  Appendix I
Note that gA can take any value; it does not have to be less than the 
weighted average cost of capital. Conversely, gB must be less than WACC for 
this perpetuity formula to be valid. Otherwise the formula goes to infinity, and 
the company eventually overtakes the world economy.
A two-stage variation can also be used for the economic-profit continuing-
value formula:1
CV
Economic Profit
WACC
NOPAT
RONIC
RONIC
WACC
=
+




−
+
+
t
t
A
A
A
g
1
1
(
)
−
(
)














−
+
+












+
WACC WACC
WACC
g
g
A
A
N
1
1
1
NOPAT
RONIC
RONIC
WACC
WACC WACC
WAC
1
1
+
(
)




−
(
)
−
(
)
+
g
g
g
A
N
B
B
B
B
C
(
)N
These formulas assume that the return on the base level of capital remains 
constant. If you want to model a decline in ROIC for all capital, including the 
base level of capital, it is best to model this into the explicit forecast.
It is difficult to model changes in average ROIC with formulas, because 
the growth rate in revenues and NOPAT will not equal the growth rate in 
free cash flow (FCF), and there are multiple ways for the ROIC to decline. 
You could model declining ROIC by setting the growth rate for capital and 
reducing NOPAT over time (in which case NOPAT will grow much more 
slowly than capital). Or you could set the growth rate for NOPAT and adjust 
FCF each period (so FCF growth again will be slower than NOPAT growth). 
The dynamics of these relationships are complex, and we do not recommend 
embedding the dynamics in continuing-value formulas, especially if the key 
value drivers become less transparent.
1 Thanks to Pieter de Wit and David Krieger for deriving this formula.