Cash Value Added - a New Method for Measuring Financial Performance
Gothenburg University Working Paper 1996:1
10 Pages Posted: 10 Feb 1998
Date Written: March 1, 1996
The biases in accounting causes management to choose inappropriate investment strategies since manager is influenced by their inaccurate perception of successful and unsuccessful businesses. Management needs a model that bridges the gap between measurement of historic financial performance and investment evaluation in order to make better strategic choice. The model must measure discounted cash flow, since cash flow and time value of money determines value. Shareholders want to make money on the company's ventures and therefore have financial requirements on management's strategic decisions, i.e. strategic investments. All additional, nonstrategic outlays with the purpose of maintaining the original value of the venture should be considered as "costs". In this paper we present a new model called Cash Value Added (CVA) that introduces a relevant cash flow benchmark which will make it possible to measure historic financial performance based on discounted cash flow.
JEL Classification: M4
Suggested Citation: Suggested Citation