Alternative performance measures Points to stress If investment is valued at discounted present value, then income would be measured as the change in present value from one period to the next. Theoreticians have long advocated the present value approach on conceptual grounds. However, it is difficult to implement, because it is hard to project both the amount and timing of the firm’s future cash flows. There is also uncertainty about the appropriate discount (interest) rate. In addition, managers being evaluated are likely to be ones who are making cash flow projections also, which creates moral hazard problems. One way to mitigate these problems is to also compare actual to forecast amounts using post-investment audits. Students who have studied economics should have seen adjustments for changes in purchasing power. The concept is the same here, except that there are different price indices for different assets. Example Students are often confused about the difference between current costs and general price-level adjusted costs. The cost of a calculator that adds, subtracts, multiplies and divides was €120 in 1972. A general price-level adjustment would value this asset in 1998 at about €439: 1.535 (1995 CPI × 0.42 (1972 CPI) This is very different from the current cost to purchase a calculator that performs the same function – about €7.
