This paper proposes a new way of decomposing net present values and net final values in periodic shares. Such a decomposition generates a new notion of residual income, radically different from the classical one available in the financial and accounting literature. While the standard residual income is formally computed as profit minus cost of capital times actual capital invested, the new paradigm introduces a fourth element: the capital invested in the so-called shadow project. Such a capital is the counterfactual capital that the investor would own if, at time 0, he invested his funds at the cost of capital, rather than in the project. Two important features are found: in primis, the new residual income is obtained as the sum of the standard residual incomes and the interest earned on past standard residual incomes; in secundis, the new paradigm is shown to be additive: the net final value of the project is computed as the sum of all periodic shares (residual incomes) with no capitalization process (abnormal earnings aggregation). A generalization is provided for a levered portfolio of projects, and a fourthfold decomposition is reached: (i) periodic decomposition, (ii) opportunity account decomposition, (iii) project decomposition, (iv) financing decomposition.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
7308.
Find related papers by JEL classification: D46 - Microeconomics - - Market Structure and Pricing - - - Value Theory G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting C0 - Mathematical and Quantitative Methods - - General G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
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