Value Creation in the Firm/La Creacion De Valor En La Empresa

Working Paper No. 14

51 Pages Posted: 7 Sep 2001

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: November 5, 2001

Abstract

This paper is a Spanish version of two previous papers published at Social Science Research Network: Value Creation and its Measurement: A Critical Look at EVA and Economic Value Measurement: Investment Recovery and Value Added - IRVA. The first section is an introduction. In section 2 a conceptual framework regarding the Net Present Value, NPV, is presented. The NPV is a method for financial decision-making based on value maximization. In section 3, the need to measure value is presented. Section 4 studies the Economic Value Added, EVA. EVA is presented as it pursues to measure the same concept as the NPV does. However, EVA starts from accounting figures (profit) and NPV starts from net cash flows. In this section it is shown the correlation between the stock value for Coca Cola and some other indicators, including Economic Profit -EP- and some examples are presented where it is shown that EVA and EP do not measure value. In section 4 some adjustments for EVA and EP are mentioned. The concept of Market Value Added is studied and the coincidence between MVA and NPV is examined. Examples are presented where some inconsistencies between the two measurements are found. In section 5 an alternative to the measurement of value is presented: Investment Recovery and Value Added. It is based on free cash flows, implies the investment recovery schedule and the discounted payback period. A procedure to calculate the real cash flow is presented. In section 6, we conclude.

English versions of two previous papers are also at SSRN: Value Creation and its Measurement: A Critical Look at EVA http://papers.ssrn.com/abstract=163466 and Economic Value Measurement: Investment Recovery and Value Added - IRVA http://papers.ssrn.com/abstract_id=223429 cash flows

Keywords: Economic Value Added; EVA; Market Value added, MVA; Net Present Value; NPV; Cash flows; Free cash flows; Real free

JEL Classification: D92, E22, E31, G12, G31, J33, M40, M41, M46

Suggested Citation

Velez-Pareja, Ignacio, Value Creation in the Firm/La Creacion De Valor En La Empresa (November 5, 2001). Working Paper No. 14. Available at SSRN: https://ssrn.com/abstract=282250 or http://dx.doi.org/10.2139/ssrn.282250

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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