Net Present Value-Consistent Investment Criteria Based on Accruals

18 Pages Posted: 22 Aug 2009

See all articles by Thomas Pfeiffer

Thomas Pfeiffer

University of Vienna - Accounting and Control

Date Written: 2004

Abstract

In recent years, many firms have favoured residual income for value based management. One main argument for this measure is its identity with the net present value rule and that this compatibility with the net present value rule holds true for all possible depreciation schedules selected. In this article, we analyse whether there are other, undiscussed, accrual accounting numbers that enable net present value-consistent investment decisions for all possible depreciation schedules. Our analysis provides an if-and-only-if characterisation of the entire class of net present value-consistent investment criteria, based on accounting information. This provides new insights into the residual income concept, hurdle rates, opening and closing error conditions achieved by applying more common performance measure structures, and allocation rules. Moreover, our analysis shows the limits of constructing such investment criteria.

Keywords: accruals, investment criteria, residual income, capital budgeting

JEL Classification: M40, M41

Suggested Citation

Pfeiffer, Thomas, Net Present Value-Consistent Investment Criteria Based on Accruals (2004). Available at SSRN: https://ssrn.com/abstract=1027063 or http://dx.doi.org/10.2139/ssrn.1027063

Thomas Pfeiffer (Contact Author)

University of Vienna - Accounting and Control ( email )

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