Abstract
A decomposition model of Net Final Values (NFV), named Systemic Value Added (SVA), is proposed for decision-making purposes, based on a systemic approach introduced in Magni [Magni, C. A. (2003), Bulletin of Economic Research 55(2), 149–176; Magni, C. A. (2004) Economic Modelling 21, 595–617]. The model translates the notion of excess profit giving formal expression to a counterfactual alternative available to the decision maker. Relations with other decomposition models are studied, among which Stewart’s [Stewart, G.B. (1991), The Quest for Value: The EVA™ Management Guide, Harper Collins, Publishers Inc]. The index here introduced differs from Stewart’s Economic Value Added (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 sufficient and necessary conditions for decomposing NFV. Relations between a project’s SVA and its shadow project’s EVA are shown, all results of Pressacco and Stucchi [Pressacco, F. and Stucchi, P. (1997), Rivista di Matematica per le Scienze Economiche e Sociali 20, 165–185] are proved by making use of the systemic approach and the shadow counterparts of those results are also shown.
Highlights
The Net Final Value is a well-known tool for projects’ economic analysis, capital budgeting, and in general, business and financial decision-making
The problem of decomposing Net Final Values has gained in recent years a renewed interest in both American and European literature, since such a decomposition gives voice, in a formal sense, to an all-pervasive notion in economics: excess profit, known as residual income
From a cognitive point of view, the concept of excess profit may be seen as the formal translation of a counterfactual conditional, as it is given by the difference between a profit and a profit that could have been realized if an alternative course of action had been undertaken
Summary
The Net Final Value is a well-known tool for projects’ economic analysis, capital budgeting, and in general, business and financial decision-making. Can rightly be regarded as one of the most significant management innovations of the past decade” (Biddle, Bowen and Wallace, 1999, p.78); Peccati develops the concept of periodic Net Final Value (NFV) of a project while Pressacco and Stucchi generalize Peccati’s model in the sense of Teichroew, Robichek and Montalbano (1965a, 1965b) by introducing a two-valued rate for the project balance; Magni proposes an index named Systemic Value Added (SVA) which decomposes the Net Final Value (NFV) of a cash-flow stream by treating the investor’s wealth as a dynamic system (whence the name of the index) The former three models share a common perspective (they are all, so to say, NFV-flavoured) whereas Magni’s model is mathematically and cognitively different.
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