| Abstract: |
This paper proposes a method for evaluating a project under certainty by means
of a systemic outlook, which borrows from accounting the way of representing
economic facts while replacing accounting values with cash values. The
investor's net worth is regarded as a system whose structure changes over
time. On this basis, a profitability index is presented, here named Systemic
Value Added (SVA), which lends itself to a periodic decomposition. While as an
overall index the Systemic Value Added coincides with the Net Final Value
(NFV) of an investment, the systemic partition of a SVA is shown to differ
from the Net Present Value (NPV) decomposition model proposed by Peccati
(1987, 1992), which in turn bears a strong resemblance to Stewart's (1991) EVA
model. The different assumptions the three models rely on are analysed: Some
inconsistencies arise in the NFV-based approach, which give rise to Peccati's
and Stewart's model, but they can be healed (only in a certain sense) by
re-shaping the model and taking account of the systemic approach. To this end,
the introduction of a shadow project is needed which enables us to avoid
compounding. An interesting result is that we can decompose the SVA of a
project by applying Peccati's argument to its shadow, or which is the same, by
computing the shadow project's Economic Value Added. The paper then
generalizes the approach allowing for a portfolio of projects, multiple debts
and multiple synchronic opportunity costs of capital, for which a
tetra-dimensional decomposition is easily obtained. |