Value-Based Performance Measurement : Further Explanation

A value-based method of performance measurement was presented in our 2004 paper in this Journal. Here we extend our earlier paper in several ways. First, we compare the value method with the internal rate of return. Both incorporate money weighting, but values are easier to use and understand. We therefore recommend performance measurement in values as the preferred money-weighted complement to measurement using time-weighted returns. Second, we highlight the fact that the contribution to terminal value of every external or internal cash flow can be measured separately. It is this feature that gives the value method its great transparency and flexibility when analysing performance over multiple time periods. Third, we discuss several aspects of implementation that are neglected in our earlier paper