Investment, financing and the role of ROA and WACC in value creation

Evaluating an industrial opportunity often means to engage in financial modeling which results in estimationof a large amount of economic and accounting data, which are then gathered in an economically rationalframework: the pro forma financial statements. While the standard net present value (NPV) condenses allthe available pieces of information into a single metric, we make full use of the crucial information suppliedin the pro forma financial statements and give a more detailed account of how economic value is created. Inparticular, we construct a general model, allowing for varying interest rates, which decomposes the projectinto investment side and financing side and quantifies the value created by either side; an equity/debtdecomposition is also accomplished, which enables to appreciate the role of debt in adding or subtractingvalue to equityholders. Further, the major role of accounting rates of return as value drivers is highlighted,and new relative measures of worth are introduced: the project ROA and the project WACC, which aggregateinformation deriving from the period rates of return. To achieve these results, we make use of the Average-Internal-Rate-of-Return (AIRR) approach, recently introduced, which rests on capital-weighted arithmeticmeans and sets a direct relation between holding period rates and NPV