This paper deals with the problem of modelling in a formal way the concept of excess profit, also known as residual income. A common idea is that excess profit is an unequivocal concept, being the difference between profit and costs, where all types of costs are taken into account, included the...

This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPV-consistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it...

In Jiang's (2017, JAI, 9 (4): 77–91), the author proposes an interesting metric, which is a special case of Average Internal Rate of Return (AIRR), introduced in Magni (2010). In the paper, the author also deals with Economic AIRR (EAIRR) (Magni 2013) and ICM-based AROI (Magni 2011, Altshuler...

In this paper, we lay out theoretical shortcomings of the IRR criteria that have largely dropped out of the finance literature. We discuss the problem of multiple IRRs and non-existent IRR under a new light. We also discuss the financial ambiguity that can arise when interpreting the IRR. Then,...

This paper applies Magni's (2011) Aggregate Return On Investment (AROI)to investment performance measurement. We show that the ratio of undiscountednet cash flow to undiscounted invested capital is not a naive metric (itseemingly does not take the time value of money into account). It is a...

This paper deals with the notion of residual income, which may be defined as the surplus profit that residues after a capital charge (opportunity cost) has been covered. While the origins of the notion trace back to the 19th century, in-depth theoretical investigations and widespread real-life...

The Net Present Value maximizing model has a respectable ancestry and is considered by most scholars a theoretically sound decision model. In real-life applications, decision makers use the NPV rule, but apply a subjectively determined hurdle rate, as opposed to the allegedly correct opportunity...

This paper shows that the CAPM-based capital budgeting criteria proposed by Tuttle and Litzenberger (1968), Mossin (1969), Hamada (1969), Stapleton (1971), Rubinstein (1973), Bierman and Hass (1973), Bogue and Roll (1974) are equivalent: They all state that a project is profitable if its...

This paper shows that (i) project valuation via disequilibrium NPV CAPM contradicts valuation via arbitrage pricing, (ii) standard CAPM-minded decision makers may fail to profit from arbitrage opportunities, (iii) standard CAPM-based valuation violates value additivity. As a consequence, the...

The Economic Value Added formally translates the theoretical notion of excess profit (also known as residual income). Its use is so firmly entrenched in applied corporate finance and management accounting that its name is often used as a noun for denoting the concept of excess profit itself....