Computing Actual Returns using Economic Depreciation
Measuring the performance of a project is a very difficult issue in project finance. You cannot evaluate returns in a normal manner using return on invested capital. I have suggested reconciling IRR and ROIC, but to really evaluate ROIC you can go further. You can compute economic depreciation by evaluating the change in the value of a project. Using economic depreciation the ROIC remains constant if your original projections are met. But if you don’t meet your projections you can evaluate your performance. Then you don’t have to waste a lot of time computing the new IRR over the entire lifetime of the project.