The ultimate goal of any business is the creation of value for the owners of that business, whether that business is privately held by one owner or is publicly held with a multitude of owners/shareholders. This tutorial will show in detail how economic profit can be used to make value-creating business decisions, and why it is a superior metric to more traditional business performance measures. A comparison will also be made between economic profit and free cash flow (FCF) to show the relevant differences between these two concepts.

Objectives
On completion you will be able to:

• Describe the use of economic profit as an economically valid business performance measurement tool and how it can help view value creation within a company
• Recast the income and balance sheet statements in order to create a NOPAT statement that reflects the economic operating inflows and outflows and an invested capital statement that represents the economic investment made by the capital contributors
• Compare the economic profit and FCF approaches in order to show the relevant differences between the two metrics