IDEAS home Printed from https://ideas.repec.org/a/taf/euract/v2y1993i2p199-218.html
   My bibliography  Save this article

Problems in measuring the cash recovery rate and measurement error in estimates of the firm IRR

Author

Listed:
  • Andrew Stark

Abstract

This paper considers the impact on estimates of the IRR derived from the cash recovery rate approach to the estimation of economic performance of an inability to observe the conceptually defined CRR from accounting data. In particular, it considers a typical proxy used in empirical applications of the CRR approach and asks the question — under what circumstances will this proxy fail to measure the true CRR? Two circumstances are identified. First, the empirical CRR will not measure the true CRR when advertising and research expenditures exist which should be treated as part of the composite investment (and, hence, as investment expenditures) but are expensed in the accounting records -referred to as the capitalize/expense case. Second, the empirical CRR will not measure the true CRR when the composite investment is made up of projects with different lives — referred to as the retirement case. For these two cases, relationships are developed between the proxy and the true CRR. From these relationships the impact of errors in measuring the CRR on estimates of the IRR are deduced. Analytically, it is demonstrated that, in the capitalize/expense case, the inability to measure the CRR produces measurement error in the IRR estimate that is monotonically and negatively related to the rate of investment growth. Further, as the proportion of expensed investment expenditures increases, measurement error increases if the investment growth rate is less than the IRR and decreases if the investment growth rate is greater than the IRR. In the retirement case, it is identified analytically that measurement error also will be monotonically and negatively related to the investment growth rate. This is the case even though the analyst is able to specify the basic relationship between investment outflows and subsequent cash inflows (the inability to spec ify this basic relationship is a problem considered in many papers on the CRR approach). Numerical examples suggest that these effects are not insignificant in size a priori.

Suggested Citation

  • Andrew Stark, 1993. "Problems in measuring the cash recovery rate and measurement error in estimates of the firm IRR," European Accounting Review, Taylor & Francis Journals, vol. 2(2), pages 199-218.
  • Handle: RePEc:taf:euract:v:2:y:1993:i:2:p:199-218
    DOI: 10.1080/09638189300000019
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09638189300000019
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alnoor Bhimani, 2002. "European management accounting research: traditions in the making," European Accounting Review, Taylor & Francis Journals, vol. 11(1), pages 99-117.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:euract:v:2:y:1993:i:2:p:199-218. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/REAR20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.