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.

Misunderstandings about Continuing Value  291
Misunderstandings about Continuing Value
Properly applied, continuing value can simplify your valuation while incor-
porating robust economic principles. In practice, however, proper application 
often requires correcting three common misunderstandings about continuing 
value. The first is the perception that the length of the explicit forecast affects the 
company’s value. As we show in this section, only the split of value is changing, 
not the total value. Second, people incorrectly believe that value creation stops 
at the end of the explicit forecast period, when return on new invested capital is 
set equal to WACC in the continuing-value formula. As we demonstrate, since 
returns from existing capital carry into the continuing-value period, aggregate 
ROIC will only gradually approach the cost of capital. Finally, some invest-
ment professionals incorrectly infer that a large continuing value relative to 
the company’s total value means that value creation occurs primarily after the 
explicit forecast period. This makes them uneasy about using enterprise DCF. 
In this section, we show why these concerns are not necessarily justified and 
why continuing value is more robust than often perceived.
Why Forecast Length Doesn’t Affect a Company’s Value
While the length of the explicit forecast period you choose is important, it does 
not affect the value of the company; it affects only the distribution of the com-
pany’s value between the explicit forecast period and the years that follow. In 
Exhibit 14.3, the value of the company is $893 million, regardless of how long 
the forecast period is. With a forecast horizon of five years, the continuing 
value accounts for 79 percent of total value. With an eight-year horizon, the 
continuing value accounts for only 67 percent of total value. As the explicit 
forecast horizon grows longer, value shifts from the continuing value to the 
explicit forecast period, but the total value always remains the same.
EXHIBIT 14.3  Comparison of Total-Value Estimates Using Different Forecast Horizons
%
Continuing value
100% =
Modeling assumptions
 
Years 1–5 
Years 6+
Growth 
9 
6
RONIC 
16 
12
WACC 
(12) 
(12)
Spread 
4 
0
$893
$893
$893
$893
$893
79
67
60
46
35
21
33
40
54
65
5
8
10
Length of explicit forecast period, years
15
20
Value of explicit 
free cash flow