Increasing goal congruence in project evaluation by introducing a strict market depreciation schedule

The economic accuracy of accrual-based managerial performance measures is most essential for value added investment decisions in decentralised firms. Contemporary EVA-literature often lends support to annuity-based depreciation schedules for accomplishing congruence between capital budgeting criteria, like NPV, and accounting measures, like ROI and RI. This is incongruent with the principal agent literature aiming at designing managerial incentive contracts. We introduce a strict market-based depreciation schedule which is shown to be superior to ordinary straight-line, annuitybased or IRR-based depreciation schedules. It gives the right managerial investment incentives also in the case of growth, inflation or technological development. r 2007 Elsevier B.V. All rights reserved.