Permanent asset decisions

Even though accounting principles encourage us to treat a corporation as a “going concern,” many people are not comfortable with this assumption. Few companies survive forever. The majority are proprietorships and partnerships that typically end with the retirement or passing of their founders. And most corporations cannot keep up with changing business and technological conditions forever; although they often live longer than proprietorships and partnerships, they too eventually perish. This is why many analysts prefer to use net annual benefit (NAB) and narrow down their decision to the coming year. On the other hand, if the forecast is for an initial cash flow followed by a perpetuity of flows, the perpetuity assumption leads to a correct decision since NPV always agrees with NAB.

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