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Increasing goal congruence in project evaluation by introducing a strict market depreciation schedule

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  • Lindblom, Ted
  • Sjögren, Stefan

Abstract

The economic accuracy of accrual-based managerial performance measures is most essential for value added investment decisions in decentralised firms. Contemporary EVA-literature often lends support to annuity-based depreciation schedules for accomplishing congruence between capital budgeting criteria, like NPV, and accounting measures, like ROI and RI. This is incongruent with the principal agent literature aiming at designing managerial incentive contracts. We introduce a strict market-based depreciation schedule which is shown to be superior to ordinary straight-line, annuity-based or IRR-based depreciation schedules. It gives the right managerial investment incentives also in the case of growth, inflation or technological development.

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  • Lindblom, Ted & Sjögren, Stefan, 2009. "Increasing goal congruence in project evaluation by introducing a strict market depreciation schedule," International Journal of Production Economics, Elsevier, vol. 121(2), pages 519-532, October.
    • Handle: RePEc:eee:proeco:v:121:y:2009:i:2:p:519-532
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    1. Magni, Carlo Alberto, 2015. "Investment, financing and the role of ROA and WACC in value creation," European Journal of Operational Research, Elsevier, vol. 244(3), pages 855-866.
    2. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.
    3. Jennergren, L. Peter, 2018. "A note on the linear and annuity class of depreciation methods," International Journal of Production Economics, Elsevier, vol. 204(C), pages 123-134.
    4. Cuthbert, James R. & Magni, Carlo Alberto, 2016. "Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR," International Journal of Production Economics, Elsevier, vol. 179(C), pages 130-140.
    5. Carlo Alberto Magni, 2015. "ROI and profitability index: A note on managerial performance," Department of Economics 0048, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    6. Magni, Carlo Alberto, 2013. "Generalized Makeham’s formula and economic profitability," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 747-756.
    7. Carlo Alberto Magni, 2015. "Investment, financing and the role of ROA and WACC in value creation," Department of Economics 0050, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    8. Magni, Carlo Alberto, 2015. "Aggregate Return On Investment for investments under uncertainty," International Journal of Production Economics, Elsevier, vol. 165(C), pages 29-37.
    9. Magni, Carlo Alberto & Marchioni, Andrea, 2020. "Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach," International Journal of Production Economics, Elsevier, vol. 229(C).

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