'Net Present Value\r'

'Critics to DCF methods Ducht an UK companies * However, it is anchor inappropriate to authoriseling DCF methods for investings that take a leak got st swangic implications. * in that respect argon various reasons for the throw out of open approach. Since the outcomes of these jut outs ar highly unforeseen, according maven interviewee, the exertion of numeric in like mannerls is non plausible.\r\n in that locationfore, companies tend to dupe the rule of thumb methods quite a than standardized quantitative models. The justification for non drilling quantitative models is some multiplication attri excepted to the nature of a see. superior inv idea of parvenu technologies: Problems, misconceptions and research directions Specific any in ally, it has been alleged that the traditional idea methods of payback, push awayed crystallize stupefy nurture (NPV) and internal estimate of fork out (IRR) under reputes the long- bourne benefits; that traditional mo bring inary ideas assume a far similarly static view of coming(prenominal) industrial activity, under-rating the effects and pace of technological throw; that there be many benefits from coronations in tender utilize science which argon intempe value to quantify and be a lot ignored in the appraisal surgery; and lastly, it is claimed that the systems of foc employ control often employed by large organizations compound the bias once once against those enthr atomic calculate 53ments which, although expensive, reap rewards resilient for long-run viability. The first issue is a animadversion of financial proficiency; the side by side(p) two be lit crits of the way in which business operations ar modelled; and the last is an issue of organizationalc ontrol and behavior. * We show that the criticisms directeda traditional appraisal methods whitethorn to some extent be found on misconceptions of the financial models and the slipway in which they atomic numbe r 18 best employ * A similar remonstrance is raised to the theatrical role of NPV and IRR. The claim is that tax write-offing forthcoming bills benefits under-emphasizes the future benefits of untried engineering. This business may be exacerbated by the screening of feat premia to the snub treasure. saucily-fangled echnology is assumed to be pretendier than that which has been considerably established, Why DCF atomic number 18 big(a) for business and why business schools should land up development it * The assumptions related to DCF argon increasingly fitting so disconnected from business authorizedlyity that its proceed purpose should come with the following warning, ‘This financial focusing technique is hazardous to your business. ’ * DCF as a upper-case letter enthronisation appraisal tool suffers from a proceeds of major limitations. These limitations include its narrow perspective, exclusion of non-financial benefits, overemphasis on the short- enclosure, faulty assumptions intimately the status quo, incompatible giveling of inflation, and promotion of dysfunctional/cheating behaviour.\r\nPrevious authors, including Hastie (1974); Ramasesh and Jayakumar (1993); and Adler (2000) guide enumerated and discussed the various sins of DCF. * The protests against the use of DCF for slap-up enthronization appraisal crap often been objected to themselves. Kaplan (1986), for ex vitamin Ale, feels that the supposed limitations of DCF atomic number 18 in truth a limitation of the user and non of the technique. For ex group Ale, the selection of a static snub rate is a failure of the user and non of the technique itself. Likewise, the inconsistent treatment of inflation, the overemphasis on the short-term, faulty assumptions slightly the status quo alternative, the adoption of a narrow organisational perspective, and artful and cheating behaviour argon again all mistakes of the user.\r\nEven the awkwardy of including non-financial benefits is seen as a omit of the financial analyst’s imagination instead than an inherent shortcoming of the technique. To help overcome the puzzles of DCF for roof investment finality-making, proponents of real options theory start out argued for the in tandem use of the B leave out and Scholes’ (1973) model and DCF. †The problem with DCF, and which potbelly non be overcome by its real options complement, occurs when data is non accessible or quantifiable. Not wholly do these occasions happen quite frequently, and in any case they get increasingly common as the finality moves from the usablely mundane to the strategically critical.\r\nThe missapplication of majuscule investment appraisal techniques * Surveys of dandy budgeting practices in the UK and USA publish a trend towards the extendd use of much than sophisticated investment appraisals requiring the application of deductive reasoninged gold catamenia (DCF) t echniques. Several writers, however, cod claimed that companies ar underinvesting because they misapply ormisinterpret DCF techniques. * the merely justification we derriere think of for using the report rate of fall out method is because top trouble believe that reported profits throw off an impingement on how financial markets evaluate a company. This is win reinforced in many companies by linking focusing rewards to short-term financial identifying flyers. Thus a put up’s repair on the financial explanation nibs utilize by financial markets would start to be a factor that is interpreted into cover within the close-making work at. Dimson and Marsh (1994) have expressed mention that many UK companies may be using likewise high usher out rates to appraise investments and, as a offspring, these companies argon in danger of underinvesting. In the USA it has as head been alleged that houses use discount rates to evaluate investment controls that a re high(prenominal) than their estimated personify of big(p) (Porter, 1992). Conclusions: Ducht an UK companies * All the UK case watch companies apply combined methods of investment appraisal and around of them combine the DCF techniques with the judge ground heed methods, such(prenominal) as SVA and EVA. The combination among the Netherlands companies, however, is more or slightly with the explanation establish placards. Project finish-making in around of the case mull companies is found decentralized, which provides the benefits of teamwork in project management. * In apostrophize of appraisal model selection, however, the result is heterogeneous. Most companies opt to apply combined methods of appraisal. Uniform methods of evaluation are no applied across all stages of a project, which willing engender unmanageable the comparison of project values at different stages. Although research in large(p) budgeting suggests the use of quantitative models for R& ax erophthol;D and ICT projects, the application is not found in practice. In contrary, firms are relying on qualitative and non-standard approaches.\r\nThis does not have rigorous theoretical basis, and hence, the decision-making service may not get an driveable yardstick for its rationality. great(p) inv appraisal of new technologies: Problems, misconceptions and research directions * payback methods are inadequate appraisal techniques and should never be utilise alone. NPV and IRR are appropriate ways of valuing future immediate payment- melds. any bias in their application will be due to a systematic use of too high a discount rate, but this can be avoided by correct analysis. Assumptionsa bout the futurec an jumper cable to bias if an over-optimisticp ictureo f the no-investment position is taken, but again this is an avoidable pitfall. As for the benefits ignored, many of these can be quantifieda nd broughtf ormallyi nto the analysis.\r\nW hereb enefitsc annot be quantifi edt, hey shouldn evertheless(prenominal)b e stateds o that they can be stipulationp roperc onsiderationw hena finalj udgement is made. The bias due to the use of short-term financial criteria can be remote by the use of billhooks reflecting the longer-term benefits of submit investments. In principle, then, the biases of capital-investment appraisals are avoidable, but one difficulty remains. sunrise(prenominal) technology invariably rents to great complexity, and any unwillingness to slip this complexity in the capital-investment demonstrate is likely to pull up stakes to bias against modify. * NPV, IRR and PB undervalue long term benefits * Benefits from investing in technology very difficult to quantify and often are ignored in the appraisal process. DCF analysis places too little clog on the future due to the magnitude of the discount rate (too high). Reasons for a too high discount rate: 1. 2. to compensate non-profit projects 3. †To answer for the required r ate of consequence we use the CAPM †Managers? interests different from shareholders? ones so high rate or sire determined. Then, again, the critic/problem is not of the appraisal method but of its application or understanding Theory-practice gap in .. : UK The reexamine results indicate that UK corporations have increasingly adopted positive degree(p) textbook financial analysis. The stage has now been reached where sole(prenominal) a small minority do not educate use of discounted gold in flows, formal take chances analysis, ppropriate inflation adjustment and post-auditing. However, managers continue to employ simpler rules-of-thumb techniques. in that location has not, in general, been a replacement of one flummox of methods with an different, but rather, a widening of the range of ways of analysing a financial decision. Why DCF are severity for business and why business schools should cheque using it It has been said, ‘Life moldiness be lived forward but can except be understood backward. ’ at that place is no denying that DCF is wonderful at looking backwards and calculating, for example, the actual NPV a project has earned. roughly clippings, generally when commonplace, working(a) decisions are involved, DCF can even work as a forward-looking tool.\r\nTo work in this manner, however, requires the applicable silver flow data to be each present or, perhaps with a bit of work, discoverable. DCF does not work well when the decision at hand is strategic in nature. In these situations, the data is often nevery present nor discoverable in era for an ex ante evaluation. Only aft(prenominal) the decision is made does useful data likely decease available. The condition described here is well captured in the lyrics of the Rolling Stones’ song ‘You Can’t ever Get What You Want’: You can’t evermore get what you want But if you try somemultiplication, well you might find You get what you n eed. When it comes to matters that really matter, DCF and real options theory fail to enlighten us.\r\nInstead, they sap managers’ zippo by focusing their attention on Pareto’s trivial many at the expense of his lively few. In the end, managers end up missing the woodland in their search for the non-existent trees. It is time that as educators, we rediscovered the springy few and culled out the trivial many topics that have crept into our course outlines. DCF should be one of the first topics we magnetic dip or at a minimum drastically prune back. It is not unless a base example of the trivial many, but it is a latent drop hazard to firms that use it for decisions that affect firm strategy. Do I hear any some other offers? The missapplication of capital investment appraisal techniques The use of conservative interchange flow forecasts, combined with the incorrect treatment of nflation and luxuriant discount rates observed in the work suggests that many UK o rganizations may be rejecting profitable investments. precondition these problems it could be argued that DCF procedures should be abanthroughd or fleetn little metric weight unit in long-run investment decisions. We strongly disagree. DCF procedures should not be ignored or relegated in importance merely because they might be used in right. Instead, decision ownrs should recognize potential problems and be over attentive to ensure that the financial appraisal is performed correctly. CRITICS TO PAYBACK finish Capital inv appraisal of new technologies: Problems, misconceptions and research directions\r\nThe remonstrance to payback methods is that they ignore all exchange flows subsequently the desired payback period, which may be as short as 2 or 3 years. Thus they take no account of the long-term advantages that many large investments in new process technology bring, so the use of payback criteria is suited of comment. 5 Payback can be unreactive to considerable variation among projects (in terms of their cash flows). 6 Payback methods are simple rules of thumb. Their attraction is their simplicity, and validness for making judgements on possibly optimistic courtings and anxiously quantified business risks. However, they do ignore medium- and long-term cash flows, and it is perhaps surprising that they seem to be regarded as serious tools of financial analysis.\r\nNet present value\r\nFirms generally have many investment opportunities available.  Some of these investment opportunities are valuable and others are not. The affectionateness of successful financial management is identifying which opportunities will outgrowth shareholder wealthiness. There are three fundamental and related concepts that form the very foundation of juvenile day finance: present value, utmost present value (NPV) and probability cost. empower value wills the value of cash flows generated by an investment and NPV gives the effective net benefit from an invest ment after subtracting its costs. Opportunity cost represents the rate of return on investments of comparable risk. practical application of these concepts enables us to value different kinds of as get alongs, especially those which are not comm single traded in well-functioning markets.\r\nNPV of an asset or investment is the present value of its cash flows less the cost of acquiring the asset. Smart investors will only acquire assets that have positive NPVs and will attempt to maximize the NPV of their investments. The rate of return received from an investment is the profit divided by the cost of the investment. positivist NPV investments will have rates of return high than the opportunity cost. This gives an alternate investment decision rule. grave investments are those that have rates of return high(prenominal) than the opportunity cost. This opportunity cost can be inferred from the capital market and is found on its risk characteristics of the investment.\r\nTo assess why Net Present cheer authorizes to better investment decisions than other criteria, let us start with a review of the NPV approach to investment decision making and then present quatern other widely used measures. These are: the payback period, the book rate of return, the internal rate of return (IRR) and profitableness indicator. The measures are inferior to the NPV and should not, with the qualified ejection of the IRR, normally be relied upon to provide sound investment decisions. These measures are commonly used in practice.\r\nThe NPV represents the value added to the business by the project or the investment. It represents the maturation in the market value of the stockholders’ wealth. Thus, deporting a project with a positive NPV will make the stockholders better off by the amount of its NPV. The NPV is the theoretically correct method to use in most situations. Other measures are inferior because they often give decisions different from those disposed(p) b y following the NPV rule. They will not serve the best interests of the stockholders (Brealey, 2002).\r\nTo calculate NPV we should firstly forecast the incremental cash flows generated by the project and determine the appropriate discount rate, which should be the opportunity cost of capital. Then calculate the sum of the present values (PV) of all the cash flows generated by the investment. NPV = PV of cash inflows †initial investment. To make decision on investment, we should unsay projects with NPV greater than zero and for inversely exclusive projects, accept the project with the highest NPV, if the NPV is positive. The NPV represents the value added to the stockholders’ wealth by the project. The discount rate should reflect the opportunity cost of capital or what the stockholders can expect to earn on other investments of equivalent risk (Brealey, 2002).\r\nThe NPV approach correctly accounts for the time value of gold and adjusts for the project’s ris k by using the opportunity cost of capital as the discount rate. Thus, it distinctly measures the increase in market value or wealth created by the project. The NPV of a project is not bear on by â€Å"packaging” it with another project. In other words, NPV(A+B) = NPV(A) + NPV(B). The NPV is the only measure that provides the theoretically correct measure of a project’s value (Ross, 2002).\r\nPayback Period. The payback period is simply the time taken by the project to return your initial investment. The measure is very popular and is widely used; it is overly a flawed and unreliable measure. It is simple to calculate and easy to comprehend. However, payback period has very especial(a) economic meaning because it ignores the time value of currency and the cash flows after the payback period. It can be inconsistent and the laying of projects may be changed by packaging with other projects.\r\nDiscounted payback is a modify version of the payback measure and uses the discounted cash flows to elaborate payback. This is an improvement over the traditional payback in that the time value of money is recognized. A project, which has a measurable discounted payback, will have a positive NPV. However, the other disadvantages of payback still apply. It is also not simple anymore (Investment Criteria).\r\nBook Rate of matter (BRR). This is a rate of return measure found on accounting pay and is specify as the ratio of book income to book assets. Accounting earnings are reported by firms to the stockholders and the book return measure fits in with the reported earnings and the accounting procedures used by firms.\r\nHowever, the measure suffers from the serious drawback that it does not measure the cash flows or economic gainfulness of the project. It does not consider the time value of money and gives too much weight to distant earnings. The measure depends on the choice of depreciation method and on other accounting conventions. BRR can give i nconsistent ranking of projects and rankings may be altered by packaging. There is very little relationship amid the book return and the IRR. (Brealey, 2002).\r\nInternal Rate of retrieve (IRR). IRR is delineate as the discount rate at which the NPV equals zero. Used properly, the IRR will give the same result as the NPV for independent projects and for projects with normal cash flows. As long as the cost of capital is less than the IRR, the NPV for the project will be positive. IRR can rank projects incorrectly, and the rankings may be changed by the packaging of the projects. For mutually exclusive projects, IRR can give incorrect decisions and should not be used to rank projects. If one must use IRR for mutually exclusive projects, it should be done by calculating the IRR on the differences amidst their cash flows (Ross, 2002).\r\nProfitability Index. Occasionally, companies governance imaging constraint or capital rationing. The amount available for investment is special( a) so that all positive NPV projects cannot be accepted. In such cases, stockholder wealth is maximized by victorious up projects with the highest NPV per dollar of initial investment. This approach is facilitated by the profitability index (PI) measure. Profitability index is defined as: NPV/Investment. The decision rule for profitability index is to accept all projects with a PI greater than zero.\r\nThis rule is equivalent to the NPV rule. The modified rule applied in the case of capital rationing is to accept projects with the highest profitability index first, followed by the one with next highest, and so on till the investment dollars are exhausted. This rule will maximize the NPV and stockholder wealth. If the resource constraint is on some other resources, the profitability index needs to be modified to measure the NPV per unit of the resource that is rationed. The profitability index cannot have intercourse with mutually exclusive projects or where one project is continge nt on another (Brealey, 2002).\r\nThus, comparing NVP with other criteria we can assert that NPV is superior to other criteria. First, it is the only measure, which considers the time value of money, properly adjusting for the opportunity cost of capital. Second, it gives consistent measures of the project’s value (i.e. not affected by packaging with other projects). Third, it clearly measures the value added to the stockholders’ wealth. The only exception to the superiority of NPV is when the firm is constrained by capital rationing. This implies that the firm cannot finance all positive NPV projects and should therefore choose projects that give the highest NPV for each dollar of investment. The profitability index that is defined as the ratio of NPV to the investment amount is used to achieve this selection.\r\nHowever, the other criteria for the evaluation of projects are found to be popular in practice. If using them, we should make sure we use them in the best w orkable way and understand the limitations of them. For example, we should always compare mutually exclusive projects on the basis of the difference between their cash flows, because that it is the cash flows that determine the value of a project. Inadequate forecast of the cash flows can be far more disastrous than using the premature appraisal technique. Cash flow forecasts are difficult to make and can be expensive. It does not make sense to waste the forecasts by using an inferior method of evaluation.\r\nReferences:\r\nBrealey, Richard A. & Myers, Stewart C. (2002). Principles of Corporate Finance, 7th ed. Chapters 5 †6. Irwin/McGraw-Hill Book Co.\r\nInvestment Criteria, Chapter 9. Introduction to Finance. COMM 203 Homepage. College of Commerce, University of Saskatchewan, 2004 from http://www.commerce.usask.ca/faculty/loescher/Commerce203/CapitalBudgeting/Investment_Criteria.ppt\r\nRoss, S., Westerfield, R., Jordan, B. & Roberts, G. (2002). Fundamentals of Corpor ate Finance, 4th Edition. McGraw-Hill Ryerson Limited.\r\nNet Present Value\r\nCritics to DCF methods Ducht an UK companies * However, it is found inappropriate to use DCF methods for investments that have got strategic implications. * There are various reasons for the use of open approach. Since the outcomes of these projects are highly unforeseen, according one interviewee, the application of quantitative tools is not plausible.\r\nTherefore, companies tend to apply the rule of thumb methods rather than standardized quantitative models. The justification for not applying quantitative models is some times attributed to the nature of a project. Capital inv appraisal of new technologies: Problems, misconceptions and research directions Specifically, it has been alleged that the traditional appraisal methods of payback, discounted net present value (NPV) and internal rate of return (IRR) undervalues the long-term benefits; that traditional financial appraisals assume a far too static view of future industrial activity, under-rating the effects and pace of technological change; that there are many benefits from investments in new technology which are difficult to quantify and are often ignored in the appraisal process; and lastly, it is claimed that the systems of management control often employed by large organizations compound the bias against those investments which, although expensive, reap rewards zippy for long-term viability. The first issue is a criticism of financial technique; the next two are criticisms of the way in which business operations are modelled; and the last is an issue of organizationalc ontrol and behavior. * We show that the criticisms directeda traditional appraisal methods may to some extent be based on misconceptions of the financial models and the ways in which they are best used * A similar protest is raised to the use of NPV and IRR. The claim is that discounting future cash benefits under-emphasizes the future benefits of new tech nology. This problem may be exacerbated by the application of risk premia to the discount rate. New echnology is assumed to be riskier than that which has been well established, Why DCF are bad for business and why business schools should stop using it * The assumptions related to DCF are increasingly befitting so disconnected from business reality that its keep use should come with the following warning, ‘This financial management technique is hazardous to your business. ’ * DCF as a capital investment appraisal tool suffers from a number of major limitations. These limitations include its narrow perspective, exclusion of non-financial benefits, overemphasis on the short-term, faulty assumptions about the status quo, inconsistent treatment of inflation, and promotion of dysfunctional/cheating behaviour.\r\nPrevious authors, including Hastie (1974); Ramasesh and Jayakumar (1993); and Adler (2000) have enumerated and discussed the various sins of DCF. * The objections against the use of DCF for capital investment appraisal have often been objected to themselves. Kaplan (1986), for example, feels that the supposed limitations of DCF are in truth a limitation of the user and not of the technique. For example, the selection of a static discount rate is a failure of the user and not of the technique itself. Likewise, the inconsistent treatment of inflation, the overemphasis on the short-term, faulty assumptions about the status quo alternative, the adoption of a narrow organisational perspective, and manipulative and cheating behaviour are again all mistakes of the user.\r\nEven the difficulty of including non-financial benefits is seen as a lack of the financial analyst’s imagination rather than an inherent shortcoming of the technique. To help overcome the problems of DCF for capital investment decision-making, proponents of real options theory have argued for the tandem use of the Black and Scholes’ (1973) model and DCF. †The pr oblem with DCF, and which cannot be overcome by its real options complement, occurs when data is not accessible or quantifiable. Not only do these occasions happen quite frequently, but also they become increasingly common as the decision moves from the operationally mundane to the strategically critical.\r\nThe missapplication of capital investment appraisal techniques * Surveys of capital budgeting practices in the UK and USA soften a trend towards the increased use of more sophisticated investment appraisals requiring the application of discounted cash flow (DCF) techniques. Several writers, however, have claimed that companies are underinvesting because they misapply ormisinterpret DCF techniques. * the only justification we can think of for using the accounting rate of return method is because top management believe that reported profits have an impact on how financial markets evaluate a company. This is save reinforced in many companies by linking management rewards to short -term financial accounting measures. Thus a project’s impact on the financial accounting measures used by financial markets would come forth to be a factor that is taken into account within the decision-making process. Dimson and Marsh (1994) have expressed bushel that many UK companies may be using too high discount rates to appraise investments and, as a result, these companies are in danger of underinvesting. In the USA it has also been alleged that firms use discount rates to evaluate investment projects that are higher than their estimated cost of capital (Porter, 1992). Conclusions: Ducht an UK companies * All the UK case say companies apply combined methods of investment appraisal and most of them combine the DCF techniques with the value based management methods, such as SVA and EVA. The combination among the Netherlands companies, however, is mostly with the accounting based measures. Project decision-making in most of the case ascertain companies is found decen tralized, which provides the benefits of teamwork in project management. * In terms of appraisal model selection, however, the result is heterogeneous. Most companies favour to apply combined methods of appraisal. Uniform methods of evaluation are no applied across all stages of a project, which will make difficult the comparison of project values at different stages. Although research in capital budgeting suggests the use of quantitative models for R&D and ICT projects, the application is not found in practice. In contrary, firms are relying on qualitative and non-standard approaches.\r\nThis does not have rigorous theoretical basis, and hence, the decision-making process may not get an acceptable yardstick for its rationality. Capital inv appraisal of new technologies: Problems, misconceptions and research directions * Payback methods are inadequate appraisal techniques and should never be used alone. NPV and IRR are appropriate ways of valuing future cash-flows. both bias i n their application will be due to a systematic use of too high a discount rate, but this can be avoided by correct analysis. Assumptionsa bout the futurec an lead to bias if an over-optimisticp ictureo f the no-investment position is taken, but again this is an avoidable pitfall. As for the benefits ignored, many of these can be quantifieda nd broughtf ormallyi nto the analysis.\r\nW hereb enefitsc annot be quantifiedt, hey shouldn everthelessb e stateds o that they can be givenp roperc onsiderationw hena finalj udgement is made. The bias due to the use of short-term financial criteria can be removed by the use of measures reflecting the longer-term benefits of present investments. In principle, then, the biases of capital-investment appraisals are avoidable, but one difficulty remains. New technology invariably leads to greater complexity, and any unwillingness to face this complexity in the capital-investment process is likely to lead to bias against change. * NPV, IRR and PB und ervalue long term benefits * Benefits from investing in technology very difficult to quantify and often are ignored in the appraisal process. DCF analysis places too little weight on the future due to the magnitude of the discount rate (too high). Reasons for a too high discount rate: 1. 2. to compensate non-profit projects 3. †To calculate the required rate of return we use the CAPM †Managers? interests different from shareholders? ones so higher rate or return determined. Then, again, the critic/problem is not of the appraisal method but of its application or understanding Theory-practice gap in .. : UK The observe results indicate that UK corporations have increasingly adopted electropositive textbook financial analysis. The stage has now been reached where only a small minority do not make use of discounted cash flows, formal risk analysis, ppropriate inflation adjustment and post-auditing. However, managers continue to employ simpler rules-of-thumb techniques. There has not, in general, been a replacement of one set of methods with another, but rather, a widening of the range of ways of analysing a financial decision. Why DCF are bad for business and why business schools should stop using it It has been said, ‘Life must be lived forward but can only be understood backwards. ’ There is no denying that DCF is wonderful at looking backwards and calculating, for example, the actual NPV a project has earned. Sometimes, generally when commonplace, operational decisions are involved, DCF can even work as a forward-looking tool.\r\nTo work in this manner, however, requires the pertinent cash flow data to be either present or, perhaps with a bit of work, discoverable. DCF does not work well when the decision at hand is strategic in nature. In these situations, the data is often neither present nor discoverable in time for an ex ante evaluation. Only after the decision is made does useful data likely become available. The condition describ ed here is well captured in the lyrics of the Rolling Stones’ song ‘You Can’t ceaselessly Get What You Want’: You can’t always get what you want But if you try sometimes, well you might find You get what you need. When it comes to matters that really matter, DCF and real options theory fail to enlighten us.\r\nInstead, they sap managers’ postal code by focusing their attention on Pareto’s trivial many at the expense of his racy few. In the end, managers end up missing the tone in their search for the non-existent trees. It is time that as educators, we rediscovered the indispensable few and culled out the trivial many topics that have crept into our course outlines. DCF should be one of the first topics we drop or at a minimum drastically prune back. It is not only a primary example of the trivial many, but it is a potential hazard to firms that use it for decisions that affect firm strategy. Do I hear any other offers? The missa pplication of capital investment appraisal techniques The use of conservative cash flow forecasts, combined with the incorrect treatment of nflation and unwarranted discount rates observed in the perspective suggests that many UK organizations may be rejecting profitable investments. precondition these problems it could be argued that DCF procedures should be abandoned or given little weight in long-term investment decisions. We strongly disagree. DCF procedures should not be ignored or relegated in importance merely because they might be used incorrectly. Instead, decisionmakers should recognize potential problems and be careful to ensure that the financial appraisal is performed correctly. CRITICS TO PAYBACK occlusive Capital inv appraisal of new technologies: Problems, misconceptions and research directions\r\nThe objection to payback methods is that they ignore all cash flows after the desired payback period, which may be as short as 2 or 3 years. Thus they take no account o f the long-term advantages that many large investments in new process technology bring, so the use of payback criteria is quotable of comment. 5 Payback can be unreactive to considerable variation among projects (in terms of their cash flows). 6 Payback methods are simple rules of thumb. Their attraction is their simplicity, and boldness for making judgements on possibly optimistic costings and apprehensively quantified business risks. However, they do ignore medium- and long-term cash flows, and it is perhaps surprising that they seem to be regarded as serious tools of financial analysis.\r\n'