What Investment Bases Should Be Used? ‘The president of a giant corporation has attended miscellaneous management education programs during the past few years. He has a persistent desire to keep abreast of the latest thinking regarding information for decisions and performance measurement. He greets you, a new graduate from a school of management, with the following comments and questions:

“As I read more and more on this subject and as I listen to more and more discussions, I become increasingly bewildered by the nomenclature and the concepts. Oh, I am aware of the infirmities of historical costs. What I am concerned about are such terms and concepts as market value, current value, replacement value, economic value, present value, opportunity value, disposal value, entry value, exit value, and countless similar terms.

“Consider our new processing equipment in Division A. It cost $10 million.

We could sell it for perhaps $7 million. How should it be valued for measuring performance in year 1? In year 5? In year 10?

“I am not asking you to pick from the existing practices of valuation. I am asking a normative question. That is, first tell me how these assets should be valued to assist decisions and to evaluate performance—without regard to the practical difficulties of implementation. After you answer the question on a normative basis, then answer it again on the basis of what might be accomplished now in our organization to implement what is conceptually most desirable.”

Prepare a memorandum in response to the president’s requirements. Include definitions of the various cost terms he mentioned. You may wish to use an example to clarify your points.