Corporate Value Creation: An Operations Framework for Nonfinancial Managers

APPENDIX D

General Equations for Estimating NI and CFaIA

INTRODUCTION

The equations developed in this appendix are intended for making quick estimates of net income and cash flows for business plans and early stage budgeting. Unlike the more familiar approach that involves detailed Profit and Loss Statements, Balance Sheets, and Cash Flow Statements, the Envelope Equations are based on the concepts of Net Income Return on Capital Employed (NiROCE), Net Investments (NetInvest), and the Investment Rate (IR).

ROCE AND NiROCE¹

In Chapter 1 the Return on Capital Employed (ROCE) was defined as:

Since the objective of the Envelope Equations is to make quick estimates of net income, the classical definition of ROCE does not suit our purpose because it deals with EBIT and to get to net income involves introducing additional complexity that isn't warranted. To get around this, the definition of ROCE is modified to use net income in place of NOPAT and designated as net income ROCE (NiROCE).²

In Chapter 2, the net investments and investment rate were defined as:

or

The Envelope Equations that ...