John’s Golf Shop
Calculating Economic Profit
John’s Golf Shop
Learning Objectives
Understand how to calculate Economic Profit and Climb the Mountain
John’s Golf Shop
John’s Golf Shop
John Smith loved golf so much that he decided to quit his day job and open a golf shop.
John had to borrow money to pay for his pro shop and support equipment, golf equipment to stock the store, as well as all the supplies needed to operate the business on a daily basis.
The weighted average cost of capital that the banks have calculated for John is 10%
John has been in business for just over two years, and would like you to assess the performance of his shop.
John’s Golf Shop
John’s Golf Shop
Initial Capital (Startup):
Pro Shop (building & land) = $100,000
Golf Equipment = $20,000
Pro Shop Equipment = $10,000
(Racks, displays, computers, etc.)
End of Year 1 Capital:
Pro Shop (building & land) = $90,000
Golf Equipment = $10,000
Pro Shop Equipment = $9,000
(Racks, displays, computers, etc.)
Year One Gross Revenue = $250,000
Operating Profit (Year One) = $16,000
Tax Rate = 35%
John’s Golf Shop
John’s Golf Shop
Initial Capital (End of Year 1):
Pro Shop (building & land) = $90,000
Golf Equipment = $10,000
Pro Shop Equipment = $9,000
(Racks, displays, computers, etc.)
End of Year 2 Capital:
Pro Shop (building & land) = $81,000
Golf Equipment = $12,000
Pro Shop Equipment = $8,100
(Racks, displays, computers, etc.)
Year Two Gross Revenue = $275,000
Operating Profit (Year Two) = $20,000
Tax Rate = 35%
John’s Golf Shop
Is John Creating or Destroying Value?
or Revenue Growth
* Copeland data refers only to Revenue Growth data, assuming that revenue growth drives cash flow growth
Economic Profit %
John’s Golf Shop
Copyright Notice
This Training Manual and all materials, procedures and systems herein contained or depicted (the "Manual") are the sole and exclusive property of George Group Consulting, . (“George Group”).
The contents hereof contain proprietary trade secrets that are the private and confidential property of George Group. Unauthorized use, disclosure, or reproduction of any kind of any material contained in this Manual is expressly prohibited. The contents hereof are to be returned immediately upon termination of any relationship or agreement giving user authorization to possess or use such information or materials. Any unauthorized or illegal use shall subject the user to all remedies, both legal and equitable, available to George Group. This Manual may be altered, amended or supplemented by George Group from time to time. In the event of any inconsistency or conflict between a provision in this Manual and any federal, provincial, state or local statute, regulation, order or other law, such law will supersede the conflicting or inconsistent provision(s) of this Manual in all properties subject to that law.
© 2004 by George Group Consulting, . All Rights Reserved.
“Lean Six Sigma” is a registered service mark of George Group Consulting, .
John’s Golf Shop
Instructor Slides
Calculating Economic Profit
Hidden
Slide
John’s Golf Shop
John’s Golf Shop
EP% = ROIC% - WACC%
EP% = NOPAT / Inv Cap - WACC%
EP% = [$20,000 * () / ($81,000+$12,000+$8,100)] - 10%
EP% = $13,000 / $101,100 - 10%
EP% = %
Rev Growth = ($275,000 - $250,000)/$250,000
Rev Growth = 10%
Hidden
Slide
John’s Golf Shop
Is John Creating or Destroying Value?
or Revenue Growth
* Copeland data refers only to Revenue Growth data, assuming that revenue growth drives cash flow growth
Economic Profit %
Hidden
Slide
John’s Golf Shop
