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Mislead Decision Makers: More Accurate Comparisons

Those who favor using gross book value argue it allows for more accurate comparisons of return on investment across subunits by not masking declines in earning power from older assets. Using net book value can mislead decision makers by showing a higher return on investment for an older hotel that has actually experienced a decrease in earning power due to its decreasing investment base from depreciation. However, net book value is preferred by some as it is consistent with balance sheets and income statements that include depreciation expense, and surveys show it is more commonly used by companies for internal performance evaluation.

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georbert abiera
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35 views

Mislead Decision Makers: More Accurate Comparisons

Those who favor using gross book value argue it allows for more accurate comparisons of return on investment across subunits by not masking declines in earning power from older assets. Using net book value can mislead decision makers by showing a higher return on investment for an older hotel that has actually experienced a decrease in earning power due to its decreasing investment base from depreciation. However, net book value is preferred by some as it is consistent with balance sheets and income statements that include depreciation expense, and surveys show it is more commonly used by companies for internal performance evaluation.

Uploaded by

georbert abiera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Those who favor using gross book value claim it enables more accurate comparisons of ROI across

subunits.

Using the net book value masks this decline in earning power because the constantly decreasing
investment base results in a higher ROI for the San Francisco hotel—24% in this example. This higher
rate may mislead decision makers into thinking that the earning power of the San Francisco hotel
has not decreased

Using the gross book value the return on the original plant-and-equipment investment is higher for the
newer New Orleans hotel than for the older San Francisco hotel. This difference probably reflects the
decline in earning power of the San Francisco hotel. Using the net book value masks this decline in
earning power because the constantly decreasing investment base results in a higher ROI for the San
Francisco hotel—24% in this example. This higher rate may mislead decision makers into thinking that
the earning power of the San Francisco hotel has not decreased.

The proponents of using net book value as an investment base maintain that it is less confusing because
(1) it is consistent with the amount of total assets shown in the conventional balance sheet, and (2) it is
consistent with income computations that include deductions for depreciation expense. Surveys report
net book value to be the dominant measure of assets used by companies for internal performance
evaluation.

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