Timo Salmi and Ilkka Virtanen

Measuring the Long-Run Profitability of the Firm;

A Simulation Evaluation of the Financial Statement Based IRR Estimation Methods

Abstract

1. Introduction

• 1.1 Background
• 1.2 Overview of Research Problem and Methodology
• 1.3 Problem Statement

• 2.1 Generation of the Capital Investment Time Series
• 2.2 Cash Inflows Produced by the Capital Investments
• 2.3 Contribution Distribution
• 2.4 Depreciation Methods
• 2.5 Accountant's vs. Economist's Profits and Annuity Depreciation

• 3.1 Kay's Method
  • 3.1.1 Presentation of the Method
  • 3.1.2 Discussion of the Method
• 3.2 Ijiri-Salamon Method
• 3.3 Ruuhela's Method
• 3.4 Discussion of the Model-Oriented IRR Estimation Methods
• 3.5 Averaged Accountant's Rate of Return Method
• 3.6 Discussion of Market-Based Methods

• 4.1 Simulation Design and Data Description
• 4.2 Evaluation of Kay's Method
  • 4.2.1 Effect of Regular Business Cycles
  • 4.2.2 Overall Accuracy of the Kay's IRR estimates
  • 4.2.3 Effect of Noise
  • 4.2.4 Effect of Contribution Patterns, Growth-Profitability Relationship and Firm's Depreciation Choice
  • 4.2.5 Effect of Major Capital Investment Shocks
  • 4.2.6 Theoretical Considerations
  • 4.2.7 Conclusions about Kay's Method
• 4.3 Evaluation of Ijiri-Salamon Method
  • 4.3.1 Exposition of the IRR Estimates with Ijiri-Salamon
  • 4.3.2 Effect of Various Factors on Ijiri-Salamon IRR Estimates
  • 4.3.3 Decomposition of the Ijiri-Salamon Method Estimation Error
  • 4.3.4 Conclusions about Ijiri-Salamon Method
• 4.4 Evaluation of Ruuhela's Method
  • 4.4.1 Effect of Regular Business Cycles
  • 4.4.2 Effect of Noise
  • 4.4.3 Effect of Contribution Patterns and Growth-Profitability Relationship and Other Factors
  • 4.4.4 Effect of Major Capital Investment Shocks
  • 4.4.5 Analysis of the Estimation Error in Ruuhela's Method
  • 4.4.6 Conclusions about Ruuhela's Method
• 4.5 Averaged Accountant's Rate of Return Method
  • 4.5.1 Closeness of the Average ARR Method to Kay's Method
  • 4.5.2 Theoretical Considerations and Conclusion
• 4.6 Comparison of the Results

References

Appendix 1. List of Symbols

Appendix 2. Annuity Depreciation under Anton Contribution Distribution

The Computer Source Codes

Please use the following reference to this publication: Salmi, Timo and Ilkka Virtanen (1997). Measuring the Long-Run Profitability of the Firm; A Simulation Evaluation of the Financial Statement Based IRR Estimation Methods. Acta Wasaensia, No. 54, University of Vaasa, Finland. Also available from World Wide Web: <URL:http://www.uwasa.fi/~ts/smuc/smuc.html>.

You can download the entire book at one go as a zipped file from Garbo archives at the University of Vaasa, Finland.