Managerial Performance Evaluation with Residual Income - Limited Investment Budget and Npv-Maximization
32 Pages Posted: 28 Jan 2004
Date Written: December 18, 2003
If the investment budget is limited, not all profitable projects can be realized. Then the principal desires the agent to select the NPV-maximizing set of projects. Residual income does not solve this problem if the agent is impatient. Even the relative benefit cost allocation scheme proposed by Rogerson does not provide a solution. In this paper we show how this goal can be achieved under the same information structure as in Rogerson (1997) or Reichelstein (1997). The result can be interpreted as an annuity benefit cost allocation scheme. Periodic shifts of the cash flows are used, which lead to a performance measure reflecting the NPV-ranking in each period.
Keywords: Investment Incentives, Residual Income, NPV-Maximization, Limited Investment Budget
JEL Classification: M41, M52, M21
Suggested Citation: Suggested Citation