ON THE EQUIVALENCE OF NET PRESENT VALUE AND MARKET VALUE ADDED AS MEASURES OF A PROJECT'S ECONOMIC WORTH

The metric Economic Value Added, or EVA, has recently become quite popular for analyzing company balance sheets, determining executive compensation packages and even project selection. The analysis entails comparing net after-tax operating profit against the allocated cost of capital for a given period. This paper shows, in general, that Market Value Added (MVA), which is the present value of a series of EVA values, is economically equivalent to the traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting. Additionally, insight is provided into the rationale behind EVA analysis through an interpretation of its capital and income allocation procedure for investment projects.     

Risk Allowance in Original Capital Investments*

In engineering economy studies, the total risk capital is often not the original capital investment. If a firm remains profitable in the future, a portion of a completely unsuccessful investment can be recovered (1) through income-tax saving as a result of the depreciation cash flows, and (2) through possible reuse of the idle depreciating facilities.

To allow for income-tax savings, the authors propose that the present worth of the guaranteed depreciation cash flow be discounted at the cost of capital and subtracted from the total initial investment to give a better measure of the risk capital. The operating profit, depreciation-free net income, can then be treated in an appropriate fashion using probabilities or a higher discount rate to account for future uncertainties in forecasting market volume, price, manufacturing costs, etc. The application of this principle has been illustrated through a number of ex amples. The results indicate the value of distinguishing between the depreciation and operational cash flow in evaluating high-risk projects in which the yield criterion is used and in mutually exclusive evaluations in which capital investment and depreciation life vary.

A further reduction in original risk capital investment may be justified if the investment still has alternate use value should the project fail; that is, in addition to the depreciation tax credit from an idle piece of equipment. The application of this principle to a mutually exclusive decision involving a grass roots plant versus a plant located as a part of an integrated facility is illustrated. Interestingly, while most decision-makers tend to be conservative with regard to reducing risk capital, ignoring the reuse potential is inconsistent in this situation as it will tend to favor the investment with the greater risk, i.e., the grass roots location.     

中国制造业上市公司投资——现金流高敏感性实证研究

由于现实中资本市场的不完善,信息不对称、代理问题和交易成本的存在,内部融资与外部融资之间存在显著的成本差异,这使现金流量在企业生存发展中起着举足轻重的作用,成为决定公司投资水平的重要因素。本文在系统借鉴和吸收国内外公司投资行为研究成果基础上,结合中国资本市场的实际情况,验证中国制造业上市公司投资支出与其内部现金流量的敏感性,通过实证研究揭示二者之间的关系及其背后动因;并在此基础上,探索建立中国上市公司投资行为分析框架,为投融资体制改革、经济政策选择、企业过度投资行为治理及投资效率的提高提供理论基础和决策依据。     

FREE CASH FLOW (FCF), ECONOMIC VALUE ADDED (EVA™), AND NET PRESENT VALUE (NPV):. A RECONCILIATION OF VARIATIONS OF DISCOUNTED-CASH-FLOW (DCF) VALUATION

The paper assists the user of DCF methods by clearly setting forth the relationship of free-cash-flow (FCF) and economic value added (EVA?) concepts to each other and to the more traditional applications of DCF thinking. We follow others in demonstrating the equivalence between EVA and NPV, but our approach is more general in that it links the problems of security valuation, enterprise valuation, and investment project selection. Additionally, our approach relates more directly to use of standard financial accounting information. Beginning with cash budget identity, we show that the discounting of appropriately defined cash flows under the free-cash-flow valuation approach (FCF) is mathematically equivalent to the discounting of appropriately defined economic profits under the EVA? approach. The concept of net operating profit after-tax (NOPAT), found by adding after-tax interest payments to net profit after taxes, is central to both approaches, but there the computational similarities end. The FCF approach focuses on the periodic total cash flows obtained by deducting total net investment and adding net debt issuance to net operating cash flow, whereas the EVA? approach requires defining the periodic total investment in the firm. In a project valuation context, both FCF and EVA? are conceptually equivalent to NPV. Each approach necessitates a myriad of adjustments to the accounting information available for most corporations.     

An Investment Model of the Demand and Supply For Industrial Real Estate

A recent inventory of industrial building in fifty-two major metropolitan areas of the country indicates that most such space is either owner occupied or single tenant. This suggests that the production of industrial space may be modeled as a firm "investment" decision. Using the completion date of each inventoried building, we construct a time series of plant completions that moves similarly to some other national investment data. We are able to successfully estimate an "accelerator" type model of plant deliveries, driven by movements in employment and the after-tax cost of corporate capital. Our model can be used to estimate a measure of excess plant capacity in the market, and historic values of this measure do move parallel to some recent industrial vacancy data.     

基于成长性差异的上市公司投资支出与现金流量的实证研究

公司处于不同的成长阶段,其面临的投资机会与现金流量的需求不同。为减少财务困境成本、避免投资不足,需要充足的现金流量才能支撑公司的健康成长。如果违背公司成长性规律,可能造成投资失误,甚至威胁公司的生存。因此,文章在建构上市公司成长性评价模型的基础上,从成长性视角出发,研究上市公司成长性与投资支出、成长性与现金流量、投资支出与现金流量间的关系,并对不同成长性公司的投资支出与现金流量进行了实证研究。主要研究发现,我国上市公司无论成长性高低,其投资支出与现金流量间呈显著正相关,而且低成长性公司的投资支出与现金流量的敏感性要高于高成长性的公司。     

Fuzzy Decision Analysis for Alternative Selection Using a Fuzzy Annual Worth Criterion

Very often, in industry, discounted cash flow techniques are applied for analyzing and selecting investment alternatives under consideration. These techniques are usually based on the data under certainty or risk. In reality, however, the decision makers are often facing the situation of vague cash flows and discount rates, or even uncertain durations, when evaluating and selecting potential investments. Fuzzy set theory has the capability of capturing vague data and allows mathematical operations. This article proposes a fuzzy equivalent uniform annual worth (fuzzy EUAW) method to assist practitioners in evaluating investment alternatives utilizing the theory of fuzzy sets. Triangular fuzzy numbers (TFNs) are used throughout the analysis to represent the uncertain cash flows and discount rates. Further, fuzzy capital recovery factors and fuzzy sinking fund factor are derived. Using these two factors, the fuzzy equivalent annual worth of each investment alternative can be found. By ranking these fuzzy numbers with the integral value, the optimal investment alternative is selected. A numerical example is provided to illustrate the results of the alternative selection.     

Returns Before and After Tax Using Sum - of- Years -Digits Depreciation

The sum-of-the-years (SYD) depreciation method complicates the relationship between the before- and after-tax returns. This paper explains the mechanics of the SYD method and develops a procedure for analyzing its influence on the overall levels of profitability. The computer is used in a parametric analysis culminating in a series of curves that can simplify the calculations in practice. In these curves, returns are made non-dimensional by dividing by the investment, the ratio being the capital recovery factor (CRF).     

ALTERNATIVE MODELS FOR FINDING CUMULATIVE PAID CAPITAL AND REMAINING BALANCE FOR A UNIFORM SERIES OF CASH FLOWS

The purpose of this paper is to propose models for finding the cumulative amount of paid capital up to a certain point in time for a discrete uniform series of cash flows, and also the unpaid capital amount of a similar séries of cash flows. An exponential model for finding the present worth for a séries of cash flows that is increasing exponentially is used to find the sum of paid capital. The second model that is used for finding the unpaid capital is developed based on the first model. The major advantages of the first model over the existing models is that it provides a direct tool for finding the cumulative amount of paid capital or unrecovered investment. The proposed models are easy to use since they are independent of finding the amount of the cash flow A. The cumulative paid interest up to a certain point in time can be found by subtracting the total repaid capital from the amount of total paid money up to that point.     

2006 IIE-EED Business Meeting Minutes

The duration measure of weighted average life has been applied in the capital budgeting literature as a measure of project liquidity. Duration is superior to payback methods because it considers both the timing and present value of the entire cash flow stream. However, the literature is ambivalent on the choice of discount rate in calculating project duration. For duration to properly serve as a project liquidity measure, the internal rate of return should be used to discount future cash flows. Examples show that using the firm's cost of capital to calculate duration fails to measure the time to recover initial project outlays in present value dollars.     

Financial Constraints, Liquidity Management and Investment

Investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained and empirical estimates of Tobin's  q  provide reliable measures of investment opportunity. Across the entire sector, we document substantial realized investment as well as high investment sensitivity to  q . Investment is also sensitive to measures of financial market frictions, suggesting that constraints on retention of cash flow distort investment decisions. Liquidity is managed through dividend policy and access to short-term bank finance, in which bank lines of credit smooth variation in available cash flow and accelerate investment. Using the Kaplan–Zingales method for measuring the degree of financial constraint, we identify substantial differences between investment and liquidity management policies of firms, in which more (less) financially constrained firms in our sample exhibit high (low) investment and liquidity management sensitivity to variables that measure financial market frictions.     

A Simulation Approach to the Appraisal of Income Producing Real Estate

The income approach to appraising real property has been criticized in at least three general areas: the use of point estimates for input variables and market value, the failure to use an after-tax valuation model, and the ability of a single valuation model to capture the market for a given property. The objectives of this study are the development of an analytical framework and computer model to overcome these criticisms. The computer model is developed using Monte Carlo simulation and allows the appraiser to consider uncertainty, after-tax cash flows and numerous valuation models. The ability of appraisers to generate the necessary inputs and the interpretation of the output from the model are demonstrated using a case study.     

TECHNICAL NOTE A NOTE ON THE COST OF OWNERSHIP,CAPITAL RECOVERY AND DEPRECIATION

This paper develops an after-tax version of the classical capital recovery equation and demonstrates its value as a screening device and as an expository tool to convey conceptual understanding of the cost of ownership, capital recovery and depreciation.     

AFTER-TAX ECONOMIC REPLACEMENT ANALYSIS

This paper examines after-tax serial replacement analysis under current United States tax law. The law explicitly defines the difference between an asset disposal (retirement) and a like-for-like exchange (replacement). A gain or loss is only realized when an asset is retired while a replacement leads to the transfer of any residual book value balance to the acquired asset. This transferal greatly complicates analysis and leads to non-stationary solutions, even with time invariant costs. We analyze the effect of this movement in book value for assets on replacement decisions. Furthermore, a dynamic programming formulation is presented with a state space defined by asset age and initial book value, as current replacement models cannot correctly capture the after-tax cash flow implications of this balance transfer. The new model is compared to traditional after-tax replacement models which assume that a gain or loss is realized at each asset sale over the horizon. Examples illustrate that this assumption can lead to widely different solutions, especially in the cases where gains or losses from asset sales are large.     

Real Estate Investment Acquisition Rules for Life Insurance Companies and Pension Funds: A Survey

Real estate comprises the major wealth of the United States as well as the world. Life insurance companies and pension funds are rapidly becoming major investors in real estate due to their large portfolios and annual cash inflows. Aggregate inflows of life insurance companies and pension funds are estimated to be about 150 billion dollars per year. Increasing amounts of these funds are believed to be going into real estate investments. This study surveys life insurance companies and pension managers on all facets of their real estate investments. The survey covers real estate portfolio size and type, portfolio composition, investment by property type, international investments, before-tax analysis, after-tax analysis, diversification strategies, computer usage, holding period assumptions and criteria for obtaining mortgages, equity positions and construction loans. The results of this study are then compared and contrasted with previous studies.     

债务期限结构对公司投资行为影响——来自制造业上市公司数据

本文以我国上市公司中的制造业为研究样本,选取了2008年横截面数据,总样本为820个,实证检验了债务期限结构对投资行为的影响,结果表明:短期负债能约束企业的投资行为,长期负债对公司的投资行为提供了一定的资金支持。实证证明了负债融资的债务期限结构对公司的投资行为存在一定的差异。     

Derivation of Cost of Capital and Equity Rates from Market Data

Use of the discounted cash flow (DCF) technique in investment and appraisal situations depends on readily available and reliable estimates of cost of capital and equity rates. Previous research on estimating equity rates and cost of capital from financial data sources is extremely limited and includes no evidence on the consistency of rates derived from alternative data sources. This paper derives estimates of equity rates and cost of capital from three alternative commonly available data sources. Estimates are derived separately for operating properties and for homebuilder/land developers on both a before- and after-corporate tax basis. The alternative data sources are found to yield consistent and reliable estimates of equity rates and cost of capital. Rates estimated from these sources are sufficiently accurate and reliable for most investment or appraisal applications.     

A review of: “THE CARELESS REVOLUTION”

Payback period is an important and widely-used measure of the economic attractiveness of an investment opportunity. It is an easy concept to understand and is readily computed by a variety of methods. The difficulty, however, is that these methods give misleading results. Nevertheless, payback period determination may be considered an effective intermediate step in the computation of the after-tax rate of return. The conversion techniques must, of necessity, be simple in order to encourage the use of rate of return as the decision criterion rather than payback period.

The relationships between payback period as defined here and rate of return are developed for both the before-tax and after-tax situations. If the tax consequences are to be considered, the tax rate and depreciation method must be known in addition to payback period and useful life. The equations derived for computing the rate of return are plotted for selected values of the parameters, and the resulting curves provide a simple means for determining the rate of return when the payback period is known.     

战略性新兴产业组织的劳资分配

战略性新兴产业组织的主导形态是模块化契约网络组织,具体包括模块制造商、系统集成商和规则设计商三类组织形态。本文认为,战略性新兴产业组织的劳资分配是对税后增加值(即税后V+M部分)的分配,具体分为两个层面:一是劳资作为一个整体(法人形式出现)以中间产品件工契约方式所进行的产业组织层面的分配,劳资群体的分配受益格局是按模块制造商、系统集成商和规则设计商顺序依次显著递增;二是劳资在产业组织层面的分配基础上所进行的企业层面的分配。本文分析指出,三类企业的劳资分配范式分属于三种不同范式:模块制造商——物质资本主导的分配范式,系统集成商——人力资本与物质资本共同主导的分配范式,规则设计商——人力资本主导的分配范式。三类企业劳资在分配中的身份、地位、收入模式、分配依据、分配顺序以及分配治理等都存在很大的不同,本文对它们进行了较系统的研究。     

INVESTMENT ANALYSIS FOR AUTOMOTIVE ELECTRONICS MANUFACTURING: A CASE STUDY

Investment opportunities for electronics manufacturing can create many challenging components within the standard context of economic analysis theory. First, most of these operations are dependent on significant capital investment with short analysis periods due to technological obsolescence. These problems are compounded with the reality of short product lives and fluctuating consumer demands. Perhaps the most challenging environment for electronics manufacturing is that of automotive electronics. These facilities are typically faced with similar manufacturing issues common in all electronics production but have the added difficulty in meeting very stringent quality and reliability requirements in a globally competitive market. This case study investigates the challenges in evaluating investment options in electronics manufacturing and pays specific attention to those issues that are most common to the automotive electronics market. In addition, the analysis investigates various sensitivity issues related to these investment opportunities and investigates an alternative investment option for a flexible manufacturing process.