Decomposition of a Certain Cash Flow Stream: Differential Systemic Value and Net Final Value

Carlo Alberto Magni

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: net present value; net final value; decomposition; residual income; systemic value; finance; accounting; quantitative methods (search for similar items in EconPapers)
JEL-codes: C0 D46 G11 G12 G31 M21 M41 (search for similar items in EconPapers)
Date: 2000-05
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Citations: View citations in EconPapers (12)

Published in Proceedings of the XXIV Annual AMASES Conference September 6-9th (2000): pp. 163-170

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https://mpra.ub.uni-muenchen.de/7898/1/MPRA_paper_7898.pdf revised version (application/pdf)

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