Also known as value-growth duration, competitive advantage period is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital. The concept of CAP was first expressed by by Miller & Modigliani in 1961.
A number of factors, both internal and external, determine a company’s competitive advantage period. Important internal factors include the company’s competitive position within that industry, and management strategies while government regulations and antitrust policies comprise the key external factors.
The formula of competitive advantage period is given by
CAP = (Value*WACC-NOPAT)(1+WACC)/I(R-WACC)
CAP = competitive advantage period
NOPAT = net operating profit after tax
WACC = weighted average cost of capital
I = annualized new investment in working and fixed capital
R = rate of return on invested capital