Present Value Depreciation and the Disaggregation Problem.

Abstract Present value depreciation has been explored in the literature as a means of reconciling the conflict between the internal rate of return of capital budgeting models (IRR) and the return on investment computed from financial statement data (ROI). Accounting accruals of cash flows confound the use of present value depreciation for this purpose, and a number of writers have suggested ways of recording accruals that yield to IRR-ROI consistency. This paper examines further the problems created by accounting accruals. The analysis shows that with the accruals required by the complete disaggregation of a project's net cash flows, IRR-ROI consistency often may be obtainable only at the cost of producing individual account balances that lack suitable economic interpretations.