Present Value Models and the Multi-Asset Problem: A Comment.

Abstract This article presents comments of the author on the article "Present Value Models and the Multi-Asset Problem," by Richard P. Brief and Joel Owen, published in the October 1973 issue of the journal "The Accounting Review." The main conclusion of the article was that the internal rate of return (IRR) is essentially a firm model, not a single-asset model. A corollary of this conclusion is that the appropriate discount rate to use in present-value depreciation models is not the IRR on each individual asset, but the overall IRR on a firm's total portfolio of assets, even where the returns on a particular asset are independent of the firm's other assets. The basic premise implicit in Brief and Owen's analysis is that the accounting model should generate expected periodic income figures that would enable firms to report periodic rates of return on book value equal to the expected IRR on the firm's total portfolio of assets at any point in time. The internal rate of return is commonly defined as the discount rate that causes the present value of cash receipts from an investment over its life to equal the present value of cash outlays related to the investment. Present value methods, in general, are designed as direct valuation models, while the accounting model explicitly recognizes only values that have been verified by exchange transactions.