how do i calculate economic profit?

Question

danielle · Answer

you start with a certain wealth let us say 1 million dollars. You follow a buy and hold strategy and compare it with an active strategy for the thing you are trying to test. Then you look whether your active return is different than zero or different than the buy and hold return.

anonymous · Answer

Is there a formula I should use?  What would the steps be to work this out?

danielle · Answer

You need to use the time value of money equations. It would be better though if you can move to the specifics. Just let me know what the problem is and why you need the economic profit and i will try to offer you guidance.

anonymous · Answer

Thanks for your support Danielle.  

I have just completed a course titled "The CEO Perspective."  One of the things been promoted was value based management and the use of economic profit as a metric rather than the traditional EBIT or NOPAT approach.  It highlighted the fact that a business can appear to be growing and profitable but the reality is it can be loss making.  I would like to run some checks against the business I work for however the course spoke of these points without going through how you do it.  The only equation I have is: $$NOPAT - Charge for Capital = Economic Profit$$My challenge is that i do not know how to take either NOPAT or Charge for Capital.  I am a novice but need to start somewhere.