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On decomposing net final values: EVA, SVA, and shadow project

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  • Magni, Carlo Alberto

Abstract

A residual-income model, named Systemic Value Added (SVA), is proposed for decision-making purposes, based on a systemic approach introduced in Magni (2000, 2003, 2004). The model translates the notion of residual income (excess profit) giving formal expression to a counterfactual alternative available to the decision maker. Relations with other residual income models are studied, among which Stewart's Economic Value Added. The index here introduced differs from EVA in that it rests on a different interpretation of the notion of excess profit and is formally connected with the EVA model by means of a shadow project. The SVA is formally and conceptually threefold, in that it is economic, financial, accounting-flavoured. Some results are offered, providing su±cient and necessary conditions for decomposing Net Final Values. Relations between a project's SVA and its shadow project's EVA are shown, all results of Pressacco and Stucchi (1997) are proved by making use of the systemic approach and the shadow counterparts of those results are also shown.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12357.

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Date of creation: 2005
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Handle: RePEc:pra:mprapa:12357

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Related research

Keywords: Excess profit; residual icome; net final value; decomposition; EVA; SVA; systemic; shadow project;

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References

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  1. Carlo Alberto, Magni, 2008. "Splitting Up Value: A Critical Review of Residual Income Theories," MPRA Paper 10506, University Library of Munich, Germany.
  2. Ezra Solomon, 1956. "The Arithmetic of Capital-Budgeting Decisions," The Journal of Business, University of Chicago Press, vol. 29, pages 124.
  3. Gronchi, Sandro, 1986. "On Investment Criteria Based on the Internal Rate of Return," Oxford Economic Papers, Oxford University Press, vol. 38(1), pages 174-80, March.
  4. Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, 04.
  5. Roberto Ghiselli Ricci & Carlo Alberto Magni, 2009. "Economic value added and systemic value added: symmetry, aditive coherence and differences in performance," PROYECCIONES FINANCIERAS Y VALORACION 005736, MASTER CONSULTORES.
  6. Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "Mathematical Analysis of Rates of Return Under Certainty," Management Science, INFORMS, vol. 11(3), pages 395-403, January.
  7. Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "An Analysis of Criteria for Investment and Financing Decisions Under Certainty," Management Science, INFORMS, vol. 12(3), pages 151-179, November.
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Cited by:
  1. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
  2. Carlo Alberto Magni, 2009. "Opportunity Cost, Excess Profit, and Counterfactual Conditionals," Frontiers in Finance and Economics, SKEMA Business School, vol. 6(1), pages 118-154, April.
  3. Roberto Ghiselli Ricci & Carlo Alberto Magni, 2006. "Economic value added and systemic value added: symmetry, additive coherence and differences in performance," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(3), pages 151-154, May.
  4. Magni, Carlo Alberto, 2010. "Residual income and value creation: An investigation into the lost-capital paradigm," European Journal of Operational Research, Elsevier, vol. 201(2), pages 505-519, March.
  5. Magni, Carlo Alberto, 2007. "A Sum&Discount method for appraising firms:An illustrative example," MPRA Paper 6114, University Library of Munich, Germany.
  6. Ghiselli Ricci, Roberto & Magni, Carlo Alberto, 2009. "Axiomatization of residual income and generation of financial securities," MPRA Paper 14438, University Library of Munich, Germany.
  7. Carlo Alberto Magni, 2006. "Zelig and the Art of Measuring Excess Profit," Frontiers in Finance and Economics, SKEMA Business School, vol. 3(1), pages 103-129, June.
  8. Magni, Carlo Alberto, 2005. "Economic profit, NPV, and CAPM: Biases and violations of Modigliani and Miller's Proposition I," MPRA Paper 7359, University Library of Munich, Germany, revised 27 Feb 2008.
  9. Magni, Carlo Alberto, 2007. "Measuring performance and valuing firms: In search of the lost capital," MPRA Paper 5850, University Library of Munich, Germany.

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