Discounted Cash Flows, Price- Level Adjustments and Expectations: A Comment.

Abstract The article informs that in a recent article in this journal professor Harold Bierman suggests that under some conditions, price-level adjustments may be less useful for purposes of decision making than the historical cost data. Bierman relies on the notion of economic depreciation which yields an asset value equal to the discounted expected future cash flows attributable to an asset. He then illustrates that if the discount rate is adjusted to reflect expected inflation, the use of economic depreciation leads to an asset value at time t precisely equivalent to the present value of the expected future cash flows under inflation at time t. Bierman then shows that if an additional adjustment for price-level change is made to the discounted value of the asset, an incorrect asset valuation is obtained. It is useful to explore the effects of Bierman's suggestions on the income statement in terms of their potential implications for decisions. Finally, one should ask about the economic significance of these results under what is known about the actions of the market and individuals in the market.