Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges”

Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges” Review of Accounting Studies, 7, 283–287, 2002 C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges” JONATHAN GLOVER Carnegie Mellon University, Graduate School of Industrial Administration, Pittsburgh, PA 15213-3890 1. Introduction Residual income based performance evaluation has received a great deal of attention in both the popular press and in academic research. To the best of my knowledge, Dutta and Reichelstein (2002) is the first principal-agent model to provide a rationalization for the use of residual income in which the conflict of interest between the principal and agent over project selection arises endogenously. 2. Example Suppose an owner has an investment opportunity that requires a cash outflow of 109 today and will produce equal cash inflows at the end of the next two years. The annual cash inflow is equally likely to be 72 or 108 per year. The owner’s discount rate is 20%. Either type of project has a positive NPV and, hence, should be accepted: −109 + 72/(1.2) + 2 2 72/(1.2) = 1 and −109 + 108/(1.2) + 108/(1.2) = 56. Now, suppose the decision rights for project acceptance resign with an (investment center) manager. There is http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges”

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1020242522608
Publisher site
See Article on Publisher Site

Abstract

Review of Accounting Studies, 7, 283–287, 2002 C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. Discussion of: “Controlling Investment Decisions: Depreciation and Capital Charges” JONATHAN GLOVER Carnegie Mellon University, Graduate School of Industrial Administration, Pittsburgh, PA 15213-3890 1. Introduction Residual income based performance evaluation has received a great deal of attention in both the popular press and in academic research. To the best of my knowledge, Dutta and Reichelstein (2002) is the first principal-agent model to provide a rationalization for the use of residual income in which the conflict of interest between the principal and agent over project selection arises endogenously. 2. Example Suppose an owner has an investment opportunity that requires a cash outflow of 109 today and will produce equal cash inflows at the end of the next two years. The annual cash inflow is equally likely to be 72 or 108 per year. The owner’s discount rate is 20%. Either type of project has a positive NPV and, hence, should be accepted: −109 + 72/(1.2) + 2 2 72/(1.2) = 1 and −109 + 108/(1.2) + 108/(1.2) = 56. Now, suppose the decision rights for project acceptance resign with an (investment center) manager. There is

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 21, 2004

References

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