Equivalence between Discounted

Cash Flow (DCF) and Residual Income (RI)

Joseph Tham
February, 2001

Abstract
Recently, the residual income (RI) model has become very popular in
valuation because it purports to measure "value added" by explicitly taking into
account the cost for capital in the income statement. Some proponents of the
residual income approach have even suggested that the RI model is superior to the
discounted cash flow (DCF) method and consequently, the DCF model should be
abandoned in favor of the RI model. The residual income model is seductive
because it purports to provide assessments of performance at any given point in
time. The claim that the RI model is superior to the DCF model in valuation is
puzzling because the RI model is simply an interesting algebraic rearrangement of
the DCF model. Since the same information is used in both models, it is not
unexpected that both models should give the same valuation results.
In this paper, I examine the idea that the residual income model is superior
to the discounted cash flow model. Using a simple numerical example, I show that
in a M & M world, the two approaches to valuation are equivalent. In practice, the
choice between the two valuation methods will be determined by the ease with
which the relevant information is available.
JEL codes
D61: Cost-Benefit Analysis
H43: Project evaluation

G31: Capital Budgeting

Key words or phrases

Economic Value Added, Residual Income Model, Cash Flow Model
Joseph Tham is a Project Associate at the Center for Business and
Government, J.F.K. School of Government. Currently, he is teaching at the
Fulbright Economics Teaching Program (FETP) in Ho Chi Minh City, Vietnam.
I thank Ignacio Vlez-Pareja for critical and helpful comments that
substantially improved the quality of the paper. I am responsible for all remaining
errors.
Constructive feedback and critical comments are welcome. The author
may be contacted at: ThamJx@yahoo.com.

Eva9a

Introduction
Recently, the residual income (RI) model has become very popular in
valuation because it purports to measure "value added" by explicitly taking into
account the cost for capital in the income statement.1 The residual income model
is seductive because it purports to provide assessments of performance at any
given point in time.2 The claim that the RI model is superior to the DCF model in
valuation is puzzling because the RI model is simply an interesting algebraic
rearrangement of the DCF model. Since the same information is used in both
models, it is not unexpected that both models should give the same valuation
results in valuation.3
In this paper, I examine the idea that the residual income model is superior
to the discounted cash flow model. Using a simple numerical example, I show that
in a M & M world, the two approaches to valuation are equivalent. In Section
One, I present and analyze the model. First, I reconcile the DCF approach and the

. Some proponents of the residual income approach have even suggested that the RI model is
superior to the discounted cash flow (DCF) method and consequently, the DCF model should
be abandoned in favor of the RI model. See Stewart (1991, pg 345)
Biddle, G. et al (1999) review the empirical evidence on the use of EVA in both valuation and
incentive compensation.
For a critical assessment of economic value added, see Velez (2000). Goetzmann & Garstka
(2000) review the historical development of measures for corporate performance.
For a more serious challenge to the DCF method and the conventional positive NPV rule, see
Dixit & Pindyck (1994, pg 6, 136) and McDonald (1998), but that is another story. Also, see
Ross (1995) and Stulz (1999)

. The RI model requires that the construction of the financial statements is based on clean
surplus relations. See Lundholm & O'Keefe (2000)

. Young and O'Byrne (2001, pg 5) write: "The basic ideas behind EVA are not new. EVA is
essentially a repackaging of sound financial management and corporate finance principles that
have been around a long time."

J.Tham, April 3, 2001

Eva9a

RI model with all-equity financing. Next, I reconcile the DCF approach and the RI
model with both debt and equity financing.4

All-equity financing
In a M & M world with all-equity financing, at the end of any year n, the
present value (PV) of the free cash flows (FCF) to the equity holder at , the
return to unlevered equity, is equal to the sum of the book value of equity at the
end of year n and the present value (PV) of the future residual income (RI).5 That
is,
VFCFn, = TBVn + VRIn, = NPVRIn,

(1)

where
VFCFn, is the present value of the FCF at the end of year n with , the return to
unlevered equity,
TBVn is the total book value at the end of year n,
VRIn, is the present value of the RI at the end of year n with , the return to
unlevered equity, and
NPVFCFn, is the net present value of the free cash flow at the end of year n with ,
the return to unlevered equity.6

. In appendix A, I show the derivation of the RI model from the cash flow to equity (CFE)
approach. For more details, see Lundholm & O'Keefe (2000)

. For simplicity, I am assuming that , the return to unlevered equity, is constant for the life of
the project.

. For clarity, I use the phrase "present value at the end of year n" to refer to future cash flows and
exclude any value at the end of year n. The phrase "net present value at the end of year n"
includes any value at the end of year n.

J.Tham, April 3, 2001

Eva9a

Consider the special case where the NPV of the project at the end of year n
is zero. Then the present value of the free cash flow is equal to the value of the
initial investment. That is,
NPVFCFn, = -Kn + VFCFn, = 0

VFCFn, = Kn

(2)

where
Kn is the value of the initial investment at the end of year n,
NPVRIn, is the net present value of the residual income at the end of year n with
, the return to unlevered equity.
In addition, if TBVn, the book value of equity at the end of year n in line 1,
is equal to the value of the initial investment Kn at the end of year n, then VRIn,
the present value of the residual income at the end of year n must be zero.

Debt and equity financing

With equity and debt financing, there are two ways to calculate the
residual income. We can use either the net operating profits after taxes (NOPAT)
with the weighted average cost of capital (WACC) or the net income with the
return to equity (levered).7
If we calculate the residual income model with the WACC, the
relationship in symbols is:
VFCFn,W = TBVn + VRIn,W

(3)

where

. In a M & M world, the WACCs and the return to equity (levered) for any year n will depend on
the debt-equity ratio at the beginning of year n and may vary through the life of the project. In
the following equations, I have omitted the time subscript for the WACC and the return to
levered equity. It is understood that in each period, the correct discount rates are calculated in a
M & M world and these discount rates are used in the discounting process.

J.Tham, April 3, 2001

Eva9a

VFCFn,W is the net present value of the FCF at the end of year n with the
appropriate annual WACCs,
TBVn is the total book value (debt plus equity) at the end of year n, and
VRIn,W is the present value of the RI (using NOPAT) at the end of year n with the
appropriate annual WACCs.
Alternatively, if we calculate the residual income with the return to levered
equity, the relationship is:
VCFEn,e = BVEn + VRIn,e

(4)

where
VCFEn,e is the present value of the cash flow to equity (CFE) at the end of year n
with the appropriate annual returns to levered equity en.
BVEn is the book value of equity at the end of year n, and
VRIn,e is the present value of the RI (using net income) at the end of year n with the
appropriate annual returns to levered equity en.

Section One
We will assume a simple project that requires an initial investment in
machinery of 1,200 at the end of year 0. The life of the project is five years and
the economic life of the machinery is assumed to be 12 years. The best estimate of
the market value of the machinery at the end of year 5 is 700. For tax purposes,
we assume straight line depreciation and thus the amount of the annual
depreciation is 100.

J.Tham, April 3, 2001

Eva9a

Table 1a: Income Statement

Year
Revenues
Depreciation
EBIT
Taxes @ 30.0 %
Net Income

1
320.2
100.0
220.2
66.1
154.2

2
320.2
100.0
220.2
66.1
154.2

3
320.2
100.0
220.2
66.1
154.2

4
320.2
100.0
220.2
66.1
154.2

5
320.2
100.0
220.2
66.1
154.2

The required return on unlevered equity, is 15% and the corporate tax
rate t is 30%. We assume that the annual revenues are constant and we have
chosen the value for the annual revenues to be 320.23 to give a NPV of zero for
the FCF.8 The income statement is show above. The annual earnings before
interest and taxes (EBIT) is 220.2 and the annual net income is 154.2.
The cash flow statement is shown below. The annual net-of-tax cash flow
is 254.2.
Table 1b: Free Cash Flow Statement
Year
0
1
2
Revenues
320.2 320.2
Terminal Value
Investment
1,200.0
NCF before taxes
-1,200.0 320.2 320.2
Taxes
66.1
66.1
NCF after taxes
-1,200.0 254.2 254.2
NPV @ 15.0 %
0.00
PV of FCF @ 15.0 %
1,200.0 1,125.8 1,040.6

3
320.2

4
320.2

5
320.2
700.0

320.2
66.1
254.2

320.2 1,020.2
66.1
66.1
254.2 954.2

942.5

829.7

0.0

. The results presented here are not affected by the fact that we have set the NPV of the project
to zero. The equivalence between the DCF method and the RI model is also true for cash flows
with positive NPV.
Furthermore, we assume that in each year, there are sufficient revenues to take advantage of the
interest deduction from debt and there are no losses carried forward (LCF). If there are losses
carried forward, an adjustment would have to be made in the calculation of the WACC. For the
necessary adjustment, see Tham (2000)
In addition, there is no reinvestment in the project, and as the cash flows are generated by the
project, they are withdrawn by the equity holder. That is, there are no retained earnings.

J.Tham, April 3, 2001

Eva9a

The table with the cash flow statement also shows the present value (PV)
of the FCF at each point in time. As expected, at the end of year 0, the PV of the
FCF is equal to the investment cost of 1,200. At the end of year 1, the PV of the
FCF is 1,125.8. The PV of the FCF declines from year 0 to year 4 because there is
no reinvestment.9
The results of the valuation calculation with the residual income are shown
in the table below.10 In this special case with all-equity financing, at the end of
any year n, the book value of equity is simply equal to the book value of the
machinery.

Table 2: Calculation of the Residual Income

Year
0
1
Revenues
320.2
Depreciation
100.0
EBIT
220.2
Taxes @ 30.0 %
66.1
Net Income
154.2
Equity Charge @ 15%
180.0
Residual Income
-25.8
NPV of RI @ 15.0 %

2
320.2
100.0
220.2
66.1
154.2
165.0
-10.8

3
320.2
100.0
220.2
66.1
154.2
150.0
4.2

4
320.2
100.0
220.2
66.1
154.2
135.0
19.2

1,200.0 1,125.8 1,040.6

942.5

829.7

5
320.2
100.0
220.2
66.1
154.2
120.0
34.2

For example at the end of year 0, we can use the residual income model for
valuation as follows.
VRI 0,15% = 1,200 + -25.8 - 10.8 + 4.2 + 19.2 + 34.2
1.15
1.152 1.153 1.154 1.155
= 1,200 -22.43 -8.17 + 2.76 + 10.98 + 17.00

. At the end of year 5, the cash flow to equity is equal to the liquidation value of 700 plus the net
of tax cash flow of 254.2.

10

. The equity charge for any year n is equal to the cost of unlevered equity times the book value
of equity at the beginning of year n.

J.Tham, April 3, 2001

Eva9a

= 1,200.1

(5)

At the end of any year n, the PV of the stream of cash flow to equity is
exactly equal to the PV of the stream of residual income plus the book value of
equity at the beginning of the year. In this example, each year the book value of
equity declines by the amount of the straight line depreciation, namely, 100.
Thus, at the end of year 1, the value is:
VRI 1,15%

= 1,100 + -10.8 + 4.2 + 19.2 + 34.2

1.15
1.152 1.153 1.154
= 1,100 -9.39 + 3.18 + 12.62 + 19.55
= 1,126.0

(6)

From the perspective at the end of year 0, the residual income is negative
in the first two years and positive in the subsequent three years.11 Compare the
NPV of the RI in Table 2 with the corresponding PV of the FCF in Table 1b. As
expected, at the end of each year, the corresponding values from the two methods
match exactly.

Debt Financing
Next we introduce debt financing and recalculate the residual income. We
assume that the cost of debt, d is constant at 12% and at the beginning of any year

11

. Thus, for a project with zero NPV, if the residual income in some years are positive, then the
residual incomes in other years must be negative in order to obtain a zero NPV There are only
two possible profiles for a stream of cash flows with a zero NPV. Either the residual income is
zero in each period, or alternatively, if there are positive residual incomes in some years, then
these must be offset by negative residual incomes in the other years. In other words, it is
impossible for a stream of cash flows with a zero NPV to have only positive residual incomes.

J.Tham, April 3, 2001

Eva9a

n, the amount of debt is 35% percent of the present value of the FCF at the end of
year n.12
Table 3a: Value of debt as a percentage of the unlevered value
Year
0
1
2
3
4
PV of FCF @ 15.0 %
1,200.0 1,125.8 1,040.6 942.5 829.7
Debt, 35% of unlevered
420.00 394.04 364.20 329.87 290.40

Based on the annual values of the debt, we can construct the loan schedule
to determine the interest payment and the repayment for the loan.13
Table 3b: Loan Schedule
Year
Beginning Balance
Interest Accrued
Payment
Ending Balance

420.0

1
420.0
50.4
76.4
394.0

2
394.0
47.3
77.1
364.2

3
364.2
43.7
78.0
329.9

4
329.9
39.6
79.1
290.4

5
290.4
34.8
325.2
0.0

Next we calculate the present value of the tax shield and add this to the
unlevered value to obtain the levered value. Here we have assumed that the
correct discount rate for the tax shield is , the return to unlevered equity rather
than d, the cost of debt.14

12

. Technically, the percentage of debt should be based on the total levered value rather than the
unlevered value. Suppose the percentage debt was defined in terms of the levered value. It is
possible to determine the percentage of debt, reexpressed as a percentage of unlevered value.
For simplicity, I have expressed the percentage of debt in terms of the unlevered value. The
assumption here does not affect the results that are presented. Note that the calculation of the
weighted average cost of capital is based on the levered value, which includes the contribution
of the tax shield. Thus, the debt as a percentage of the levered value will be less than 35%.

13

. The repayment in year n is equal to the interest accrued in year n plus the beginning balance in
year n less the beginning balance in year n+1. The loan schedule will also allow us to estimate
the cash flow to equity (levered.) The calculation is not shown here, but we could use the
varying returns to levered equity and the CFE to estimate the annual values of the levered
equity and they would be consistent with the values obtained from the RI model.

14

. For a discussion on why , the return on unlevered equity, is the appropriate discount rate for
the tax shield, see Tham (1999)

J.Tham, April 3, 2001

Eva9a

Table 4: The present value of the tax shield

Year
0
1
Interest Payment
50.4
Tax Shield (TS)
15.12
PV of TS @ 15.0 %

44.5

36.0

2
47.3
14.19

3
43.7
13.11

4
39.6
11.88

27.3

18.2

9.1

5
34.8
10.45

Thus, at the end of year 0, the present value of the tax shield is 44.5. To obtain the
levered value in any year n, we add the present value of the tax shield to the
corresponding unlevered value.

Income Statement with interest deduction

The income statement with the interest deduction is shown below.
Table 5: Income statement with interest deduction
Year
0
1
Revenues
320.2
Depreciation
100.0
EBIT
220.2
Interest Payments
50.4
Taxable Income
169.8
Taxes with tax savings
50.9
Net Income
118.9
Dividends
118.9
Retained Earnings
0.0

2
320.2
100.0
220.2
47.3
172.9
51.9
121.1
121.1
0.0

3
320.2
100.0
220.2
43.7
176.5
53.0
123.6
123.6
0.0

4
320.2
100.0
220.2
39.6
180.6
54.2
126.4
126.4
0.0

5
320.2
100.0
220.2
34.8
185.4
55.6
129.8
129.8
0.0

Note that the difference in the tax payments between Table 5 and Table 1a is
equal to the tax shield given in Table 4. We assume that there are no retained
earnings and all of the net income is paid out as dividends to the equity holder.

Return to levered equity and WACC

In any year n, the return to levered equity is given by

J.Tham, April 3, 2001

10

Eva9a

en = + ( - d)*%Dn-1
%En-1

(7)

where %Dn-1 is the value of debt, as a percentage of the levered value, at the
beginning of year n and %En-1 is the value of equity, as a percentage of the
levered value, at the beginning of year n. Since the debt-equity ratio increases
consistently from 0.51 in year 1 to 0.53 in year 5, the return to levered equity
increases from 16.53% in year 1 to 16.59% in year 5.
In any year n, the net-of-tax WACC is given by
WACCn = %Dn-1*d*(1 - t) + %En-1*en

(8)

Similarly, due to the changing debt-equity ratio, the net-of-tax WACC decreases
from 13.79% in year 1 to 13.75% in year 5.
The results of the calculation of the annual returns to levered equity and
the annual weighted average cost of capital (WACC) are shown in the table
below.
Table 6: Calculation of the annual returns to levered equity and the annual
WACCs
Year
0
1
2
3
4
PV of FCF @ 15.0 %
1,200.0 1,125.8 1,040.6 942.5 829.7
Value of Tax Shield
44.5
36.0
27.3
18.2
9.1
Total Levered Value
1,244.5 1,161.9 1,067.8 960.7 838.8
Value of debt
Value of equity (levered)
Debt, % of levered
Equity, % of levered
Debt-Equity Ratio

420.00 394.04 364.20 329.87 290.40

824.48 767.83 703.62 630.85 548.40
33.7%
66.3%
0.509

33.9%
66.1%
0.513

34.1%
65.9%
0.518

34.3%
65.7%
0.523

34.6%
65.4%
0.530

Equity Return (levered), e

16.53% 16.54% 16.55% 16.57% 16.59%

WACC

13.79% 13.78% 13.77% 13.76% 13.75%

J.Tham, April 3, 2001

11

Eva9a

Residual Income with the variable WACCs

Next, I will calculate the residual income in two ways: with the WACC
and with the return to levered equity. The NPV of the residual income with the
WACC will be compared with the PV of the FCF, and the NPV of the residual
income with the return to levered equity will be compared with the PV of the cash
flow to levered equity (CFE).
The results of the calculation of the residual income with the WACC is
shown in table 6 below.15

Table 7: Calculation of the residual income with the WACC

Year
0
1
2
Revenues
320.2 320.2
Depreciation
100.0 100.0
Taxable Income
220.2 220.2
Taxes
66.1
66.1
NOPAT
154.2 154.2
Equity Charge w/ WACCn
165.4 151.6
Residual Income (RI)
-11.3
2.6

3
320.2
100.0
220.2
66.1
154.2
137.7
16.4

4
320.2
100.0
220.2
66.1
154.2
123.9
30.3

NPV of RI

960.7

838.8

1,244.5 1,161.9 1,067.8

5
320.2
100.0
220.2
66.1
154.2
110.0
44.1

At the end of any year n, the total book value of the project (debt plus equity) is
equal to the value of the machinery at the end of year n. The value of the
machinery declines each year by 100. In Table 7, the residual income for any year
n is based on the book value of the project (debt plus equity) at the beginning of
the year and values for the WACC from Table 6. Again, note that the WACC is
not constant for the life of the project and decreases from 13.79% in year 1 to
15

. Note that the taxes are the same as the taxes for the all-equity financing case in Table 2. That
is, the tax savings from the interest deduction is not taken into account. The benefit of the tax
shield is taken into account in the lower values of the WACCs over the life of the project.

J.Tham, April 3, 2001

12

Eva9a

13.75% in year 5. For the end of any year n, compare the NPV of the RI in Table
7 with the corresponding levered value in Table 6. They match exactly.

Residual Income with the variable returns to levered equity

If we calculate the residual income with the return to levered equity, we
need to determine the book value of equity. The balance sheet is shown below.

Table 8: Balance Sheet

Year
Assets
Machinery
Liabilities
Debt
Shareholders' Equity

0
1
2
1,200.0 1,100.0 1,000.0

3
900.0

4
800.0

5
700.0

420.0 394.0 364.2

780.0 706.0 635.8
1,200.0 1,100.0 1,000.0

329.9
570.1
900.0

290.4
509.6
800.0

325.2
374.8
700.0

In Table 8, note that at the end of any year n, the book values for the
shareholder's equity in the Balance Sheet is lower than the market value of the
levered equity in Table 5. In the calculation of the residual income with the return
to levered equity, we use the book values for equity in Table 8 and the return to
levered equity in Table 5. Again, note that the return to levered equity is not
constant for the life of the project and increases from 16.53% in year 1 to 16.59%
in year 5.
The calculation of the residual income with the return to levered equity is
shown in Table 9 below.16

16

. In this case, the tax savings from the interest deduction is taken into account and the taxes are
based on the income statement in Table 5. The reason is because the tax savings accrue to the
levered equity holder.

J.Tham, April 3, 2001

13

Eva9a

Table 9: Calculation of the residual income with the return to levered equity
Year
0
1
2
3
4
Revenues
320.2 320.2 320.2 320.2
Depreciation
100.0 100.0 100.0 100.0
Interest Payments
50.4
47.3
43.7
39.6
Taxable Income
169.8 172.9 176.5 180.6
Taxes
50.9
51.9
53.0
54.2
Net Income
118.9 121.1 123.6 126.4
Equity Charge with en
128.9 116.8 105.2
94.5
Residual Income (RI)
-10.0
4.3
18.3
32.0
NPV of RI

5
320.2
100.0
34.8
185.4
55.6
129.8
84.5
45.2

824.48 767.83 703.62 630.85 548.40

For the end of any year n, compare the NPV of the RI in Table 9 with the
corresponding levered equity values in Table 6. They match exactly.

Conclusion
I have used a simple numerical to show that in a M & M world, the DCF
method and the RI model yield identical results. Thus, from a valuation point of
view, at the end of any year n, it would not matter whether we used the FCF, the
CFE or the RI approach.
Since the residual income model and the cash flow model give the same
value at any point in time, a proponent of the residual income model may assert
that it does not matter which model is used for valuation; from a purely algebraic
point of view, the two models are equivalent. At a minimum, the current analysis
and discussion has shown that from a conceptual point of view, in valuation, the
residual income model is not superior to the cash flow model. In short, what is the
residual income approach? It is simply NPV re-expressed and repackaged in book

J.Tham, April 3, 2001

14

Eva9a

values and accounting terms.17 In practice, the choice between the two methods
for valuation will be determined by the ease with which the relevant information
is available.

17

. See Young & O'Byrne (2001,pg 5)

J.Tham, April 3, 2001

15

Eva9a

APPENDIX A
In this appendix, we will use simple algebra to show the derivation of the
residual income model from the CFE model. The notation is based on Lundholm
& O'Keefe (2000). See Lundholm & O'Keefe (2000) for further details.
For simplicity, I will use a cash flow with three periods. Let Dn be the
dividends in year n. Initially, assume that there is no debt financing and n is the
required return for unlevered equity in year n.
Let n = 1/(1 + n). Then assuming clean surplus relations, we have
Dn = NIn + SEn-1 - SEn

(1a)

Dn = NIn - SEn

(1b)

where SEn is the book value of the shareholders' equity in year n and NIn is
the net income in year n.
Define the residual income in year n as the difference between the net
income in year n and a charge for equity based on the book value of equity at the
beginning of the year.
RIn = NIn - n*SEn-1

(2)

Substituting line 2 into line 1, we obtain that

Dn = RIn + n*SEn-1 + SEn-1 - SEn

(3a)

Dn = RIn + SEn-1/n - SEn

(3b)

The cash flow to equity (CFE) is the annual dividend payments plus the
terminal value at the end of year 3. The present value of the CFE is:
PV(CFE) = 1*D1 + 1*2*D1 + 1*2*3*D1
+ 1*2*3*TV

J.Tham, April 3, 2001

(4)

16

Eva9a

where TV is the terminal value in year 3.

Substituting line 3b into line 4, we obtain
PV(CFE) = 1*[RI1 + SE0/1 - SE1] + 1*2*[RI2 + SE1/2 - SE2]
+ 1*2*3*[RI3 + SE2/3 - SE3]
+ 1*2*3*TV

(5)

Rearranging, we obtain
PV(CFE) = 1*RI1 + 1*2*RI2 + 1*2*3*RI3
+ SE0 - 1*SE1 + 1*SE1 - 1*2*SE2 - 1*2*SE2
- 1*2*3*SE3 + 1*2*3*TV

(6)

Since the terminal value at the end of year 3 is the same as the value of the
shareholder's equity at the end of year 3, we can simplify line 6 as follows.
PV(CFE) = SE0 + 1*RI1 + 1*2*RI2 + 1*2*3*RI3

(7)

More generally, at the end of any year n, the PV of the stream of cash
flows to the equity holder is equal to the PV of the stream of residual incomes
(plus the book value of equity at the end of year n)

J.Tham, April 3, 2001

17

Eva9a

REFERENCES
Biddle, G. et al. (1999) "Evidence on EVA" Social Science Research Network
(SSRN)
Copeland, T. & Weston, F. (1988) Financial Theory and Corporate Policy
(Addison-Wesley)
Dixit & Pindyck (1994) Investment under uncertainty (Princeton University Press)
Ehrbar, A. (1998) The Real Key to Creating Wealth (Wiley)
Goetzmann, W. and Garstka, S. (2000) "The Development of Corporate
Performance Measures." Social Science Research Network (SSRN)
Lundholm, R. & O'Keefe, T. (2000) "Reconciling Value Estimates from the
Discounted Cash Flow Model and the Residual Income Model." Working
Paper. Social Science Research Network (SSRN)
McDonald, R. (1998) "Real Options and Rules of Thumb in Capital Budgeting",
Working Paper (Northwestern University)
Ross, S. (1995) "Uses, Abuses and Alternatives to the Net-Present Value Rule."
Financial Management, Vol. 24, #3,Autumn 1995.
Stewart, G. (1991) The Quest for Value (HarperBusiness)
Stulz, R. (1999) "What's wrong with modern capital budgeting." Address to
Eastern Finance Association. Social Science Research Network (SSRN)
Tham, J. (2000) " Practical Equity Valuation." Social Science Research Network
(SSRN)
Tham, J. (1999) "Present Value of the Tax Shield in Project Appraisal: a note."
Development Discussion Paper # 695, Harvard Institute for Economic
Development (HIID) Also available at papers.SSRN.com.
Velez, I. (2000) "Value Creation and its measurement: a critical look at EVA"
Social Science Research Network (SSRN)
Young, S.D. & O'Byrne, S (2001) EVA and Value-Based Management (McGraw
Hill)

C:\Tham9\Papers2\EVA1\Eva9a.DOC
Tuesday, April 03, 2001

J.Tham, April 3, 2001

18