On The Non-Adoption Of Present Value Depreciation In Managerial Performance Evaluation

Abstract

Present value depreciation has long been advocated as a way to improve the dominant return on investment (ROI) managerial performance measure. Yet, to date, reported adoptions of this approach have been rare. Since providing appropriate managerial incentives is increasingly important in this era of intensifying global competition, it is useful to explore why firms are foregoing this theoretically superior approach. This paper points out that the non-adoption of present value depreciation may be an economically rational choice. It notes that advocates of present value depreciation have failed to consider some potentially significant implementation costs. In addition, a small scale computer simulation reveals that under conditions of uncertainty and correlated cash flows, ROI calculated under conventional depreciation procedures can often closely approximate the theoretically correct value. Hence, besides providing a specific analysis of present value depreciation, this study also underlines afresh the importance of cost/benefit considerations in developing or adopting new approaches to business problems.