CH 10. 6 EXHIBIT 10.13 ApparelCo: Free Cash Flow and Economic Profit Forecasts $ million Today Year 1 Year 2 Year 5 Continuing value Revenues 250.0 265.D 280 9 297 8 3156 334.6 354 6 Operating costs (225.0) (238.5) (252.8) (268.0) [284. 1] 301.11 (319.2) Operating profit 25.0 26.5 29.8 31.6 Operating taxes (6.3) (6.6) 17.0) 17.4) 17.91 (84 (8.9 NOPLAT 18.8 19.9 21.1 22.3 23.7 25.1 Net investmont (B.D) 18 91 (9.5] [10.01 Free cash flow 11.9 13.4 142 15.1 Economic profit NOPLAT 19.9 21.1 22.3 23.7 25.1 26 5 Invested capital, 132.5 140.5 148.9 157.8 167.3 177.3 x Cost of capital Ipercent) 10.D 10. 0 100 10.0 10.0 10.D Capital charge 13.3 14.0 149 158 16.7 Economic profit 5.5 7.D 7.4 7.9 84 89 Superior Co earns a return on invested capital of 20% on its existing stores. Given intense competition for new store sites, you believe new stores will only earn their cost of capital. Consequently, you set return on new capital (8%) equal to the cost of capital (8%) in the continuing value formula. A colleague argues that this is too conservative, as Superior Co will create value well beyond the forecast period. What is the flaw if your colleague's argument