A NEW APPROACH TO DEPRECIATION MEASUREMENT FOR PUBLIC UTILITIES: COMMENT |
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Authors: | John S. Ferguson |
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Affiliation: | 1. Deloitte, Haskins &2. Sells |
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Abstract: | This paper examines the use of a simple heuristic for evaluating projects. We posit that ranking projects by IRR and rejecting marginal projects can be superior to a NPV rule if 1) project managers have incentives to overstate cash flow forecasts that occur late in a project's life, 2) project rankings determine project acceptance because not all positive NPV project's are accepted, and 3) a project's IRR is greater than the WACC. In these instances, the IRR heuristic undervalues distant cash flows and thus, reduces project managers' incentives to positively bias forecasts. |
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