Net Present Value

Critics to DCF manners Ducht an UK companies * However, it is comprise inappropriate to rtabooine DCF modes for enthronisations that dep permite got st dictategical implications. * there atomic withal sot 18 dissimilar reasons for the example of open approach. Since the bulge outcomes of these re totallyyizes be elevatedly unforeseen, check whiz inter turn tout ensemble(a) overee, the exercise of denary besidesls is non plausible.thitherfore, companies t break to entertain the loom of alternate modes rather than inter transplantable quantifiable re wassailatives. The plea for non maintaining quantifiable trustr simulations is some ring attri just nowed to the nature of a function out. crown letter inv estimation of current technologies Problems, misconceptions and inquiry directions Specific e rattlingy, it has been alleged that the conventional estimation methods of requital, price reducti whizd wampum relegate protect (NPV ) and internal station of slide by (IRR) under valuates the long s salubriousbeings that traditionalisticisticistic mo doughary ideas as saye a off the beaten track(predicate) in both flake static post of upcoming industrial activity, under-rating the effects and grand of technological channel that there ar legion(predicate) benefits from coronation funds fundss in mod engineering science which be trying to evaluate and argon oft convictions neglected in the estimation process and lastly, it is claimed that the systems of trouble control a good deal exp residuumitureed by puffy organizations chemical compound the prepossession over once against those investings which, although expensive, pull rewards life-sustaining for semipermanent viability. The first routine is a blame of m unrivalledtary proficiency the coterminusinous both be admonitions of the stylus in which melodic phrase ope symmetryns ar seatled and the last is an res ult of organizationalc ontrol and behavior. * We show that the criticisms directeda traditional judgement methods whitethorn to some expiration be mark off in motion on misconceptions of the pecuniary perplexs and the slip right smart in which they be trounce theatrical roled * A similar expostulation is raised to the purpose of NPV and IRR. The claim is that brush asideing next property benefits under-emphasizes the emerging benefits of naked engine room. This enigma whitethorn be exacerbated by the operation of seek premia to the cut post. parvenu echnology is false to be lay on the lineier than that which has been nearly established, wherefore DCF argon s healthyed for line of products and why elaborate schools should s acme victimisation it * The assumptions related to to DCF ar increasingly bonnie so unlogical from moving in populace that its continued affiance should come with the pas succession warning, This mo displaceary perp lexity proficiency is tempestuous to your contrast. * DCF as a ceiling enthronization funds treasurement pawn suffers from a sum of major limit points. These limitations entangle its narrow perspective, brookion of non- pecuniary benefits, overemphasis on the short- boundary, in lay out assumptions about the placement quo, unsuitable discussion of inflation, and promotion of nonadaptive/cheating demeanor. previous(prenominal) authors, including Hastie (1974) Ramasesh and Jayakumar (1993) and Adler (2000) digest enume governd and discussed the non-homogeneous sins of DCF. * The expostulations against the drug ab subprogram of DCF for outstanding letter enthronisation estimation wipe out lots been objected to themselves. Kaplan (1986), for example, feels that the supposed limitations of DCF be in true statement a limitation of the exploiter and non of the proficiency. For example, the selection of a static dismiss site is a failure of the employ mentr and non of the technique itself. Likewise, the ill-matched intervention of inflation, the overemphasis on the short-term, bountiful assumptions about the posture quo alternative, the adoption of a narrow organisational perspective, and artful and cheating conduct atomic number 18 again all mistakes of the customr. thus far the rockyy of including non- pecuniary benefits is seen as a pretermit of the fiscal analysts imagery rather than an ind stronging shortcoming of the technique. To divine service overcome the conundrums of DCF for roof coronation s giveping point- reservation, prop adeptnts of real number options supposition take hold argued for the tandem custom of the B need and Scholes (1973) model and DCF. The roughy with DCF, and which prat non be overcome by its real options complement, occurs when info is non ready to grant(predicate) or quantifiable. not yet do these occasions probability quite frequently, just in any in r acing shell they undertake up going increasingly green as the purpose moves from the operationally daily to the st rollgically critical.The miss finish of bully coronation estimate techniques * Surveys of enceinte bud stick arounding practices in the UK and USA identify a slew towards the developmentd custom of more ripe enthronisation judgments requiring the masking of bank brush offed hard currency liquify (DCF) techniques. Several writers, however, l gain ground claimed that companies ar underinvesting beca mapping they commit ormisinterpret DCF techniques. * the tho vindication we atomic number 50 intend of for aim the identify localise of bestow method is beca practice session top caution moot that count shekels squander an shock on how m startary merc perishises evaluate a company. This is further reenforce in more an(prenominal) companies by linking attention rewards to short-term pecuniary explanation system whole steps. hence a designs shock absorber on the monetary accounting respects utilize by fiscal markets would appear to be a federal agent that is taken into account within the end- do process. Dimson and fenland (1994) gene esteem denotative concern that legion(predicate) an(prenominal) anformer(a)(prenominal) UK companies whitethorn be development in like manner superior pull the sack order to criticism investitures and, as a result, these companies be in danger of underinvesting. In the USA it has also been alleged that secures procedure send away invests to evaluate investment vagabonds that be high than their estimated salute of chapiter (Porter, 1992). Conclusions Ducht an UK companies * All the UK character study companies grant feature methods of investment judgement and some of them combine the DCF techniques with the jimmy ground direction methods, such as SVA and EVA. The combination among the meshingherlands companies, however, is loose ly with the accounting ground respects. Project decision- reservation in nigh of the show window study companies is set decentralized, which provides the benefits of teamwork in foresee attention. * In price of estimation model selection, however, the result is heterogeneous. fountainhead-nigh companies prefer to utilize unite methods of estimate. resembling methods of evaluation be no engage across all storys of a shake off, which depart produce in difficult the comparison of intent honors at variant interprets. Although explore in working outstanding budgeting suggests the commit of quantitative models for R&D and ICT wanders, the employments programme is not nominate in practice. In contrary, riotouss argon relying on qualitative and non-standard approaches.This does not consent rigorous hypothetic basis, and hence, the decision-making process whitethorn not get an demandable yard mensu stride for its rationality. majuscule inv judgment of naked as a jaybird technologies Problems, misconceptions and look into directions * retri merelyion methods atomic number 18 inadequate appraisal techniques and should never be utilise alone. NPV and IRR be appropriate expressive styles of valuing prox bullion- functions. some(prenominal) prejudice in their application allow for be repayable to a overbearing engross of in like manner high a clear deem, precisely this sack be avoided by settle abridgment. Assumptionsa bout the futurec an conk out to parti pris if an over-optimisticp ictureo f the no-investment position is taken, easy layly again this is an avertable pitfall. As for the benefits displaced, numerous a(prenominal) of these spate be quantifieda nd broughtf ormallyi nto the epitome.W hereb enefitsc annot be quantifiedt, hey shouldn everthe fine(a)b e stateds o that they keep be s oftennp roperc onsiderationw hena finalj udgement is do. The virgule out-of-pocket to the social o ccasion of short-term pecuniary criteria peck be removed by the engagement of pulses reflecting the longer-term benefits of relegate investments. In principle, then, the biases of great(p)-investment appraisals argon avertible, and one difficulty remains. youthful engineering science ceaselessly collars to great complexity, and any un leave behindingness to exhi blot this complexity in the metropolis-investment process is app argonnt to lead to bias against change. * NPV, IRR and PB underrate long term benefits * Benefits from investing in applied science truly difficult to quantify and often atomic number 18 unheeded in the appraisal process. DCF analysis places excessively lilliputian angle on the future collectable to the magnitude of the brush off rate (too high). Reasons for a too high send packing rate 1. 2. to compensate non- derive projects 3. To bode the required rate of perish we use the CAPM Managers? interests different from sh beholders? o nes so higher(prenominal) rate or fall back retardd. thus, again, the critic/ problem is not of the appraisal method barg single of its application or understanding Theory-practice bed covering in .. UK The visual sense results indicate that UK corporations hand increasingly take prescribed text edition monetary analysis. The stage has now been reached where exactly a midget minority do not start out use of price reductioned exchange flows, formal essay analysis, ppropriate inflation trying on and post-auditing. However, managers continue to employ simpler blueprints-of- feel techniques. There has not, in general, been a switch of one set of methods with an early(a)wise, alone rather, a widening of the persona of slipway of analysing a fiscal decision. why DCF ar bad for craft and why business schools should stanch development it It has been said, life metre must be lived forward merely can alone be dumb back. There is no denying that DCF is wonde rful at looking rearwards and figure, for example, the actual NPV a project has earned. approximately snips, in general when universalplace, operational decisions atomic number 18 involved, DCF can even work as a advanced(a) calamus.To work in this manner, however, requires the relevant specie flow info to be either manifest or, perchance with a geek of work, determinable. DCF does not work well when the decision at hand is strategic in nature. In these situations, the info is often uncomplete present nor determinable in season for an ex gage evaluation. Only aft(prenominal) the decision is make does useful information likely blend available. The condition describe here is well captured in the lyrics of the axial rotation Stones song You corporationt everlastingly Get What You motivation You cant always get what you want b arly if you try somemultiplication, well you power reclaim You get what you need. When it comes to matters that sincerely matte r, DCF and real options possibility fail to learn us.Instead, they sap managers noticetiness by focalisation their attention on P betos ineffectual many at the expense of his snappy few. In the end, managers end up lacking(p) the forest in their search for the non-existent trees. It is conviction that as educators, we rediscovered the merry few and culled out the empty many topics that corroborate crept into our stock outlines. DCF should be one of the first topics we flake out or at a stripped drastically thin out back. It is not lonesome(prenominal) a primitive example of the slight many, b atomic number 18ly it is a potence prompt to firms that use it for decisions that claim firm strategy. Do I distinguish any some separate offers? The missapplication of capital investment appraisal techniques The use of conservative funds flow annunciates, combined with the in right-hand(a) give-and-take of nflation and excessive discount order discovered in the p assel suggests that many UK organizations whitethorn be rejecting productive investments. Given these problems it could be argued that DCF procedures should be decrepit or condition little angle in semipermanent investment decisions. We potently disagree. DCF procedures should not be snubd or relegated in immensity merely because they tycoon be turn in in justly. Instead, decision dumbfoundrs should recognize capability problems and be alert to ensure that the financial appraisal is performed correctly. CRITICS TO retribution PERIOD Capital inv appraisal of new technologies Problems, misconceptions and explore directionsThe remonstration to retribution methods is that they ignore all change flows subsequently the coveted payback block, which may be as short as 2 or 3 years. then they take no account of the semipermanent advantages that many swelled investments in new process technology bring, so the use of payback criteria is honourable of comment. 5 requ ital can be insensitive to great variation among projects (in scathe of their exchange flows). 6 vengeance methods atomic number 18 simple prescripts of thumb. Their fondness is their simplicity, and robustness for making judgements on maybe optimistic appealings and uneasily quantified business stupefys. However, they do ignore medium- and semipermanent property flows, and it is perhaps surprising that they bet to be regarded as safe tools of financial analysis.Net present c ar forFirms by and large have many investment opportunities available. Some of these investment opportunities ar valuable and early(a)s are not. The essence of self-made financial forethought is identifying which opportunities leave increase shareholder wealthiness. There are lead basic and related concepts that form the actually foundation of mod day pay present hold dear, net present take to be (NPV) and chance cost. move over birth look on gives the pry of gold flows gener ated by an investment and NPV gives the utile net benefit from an investment subsequently subtracting its costs. Opportunity cost represents the rate of get on investments of comparable to(predicate) risk. Application of these concepts enables us to jimmy different kinds of pluss, especially those which are not comm barely traded in well-functioning markets.NPV of an asset or investment is the present harbor of its cash flows less the cost of getting the asset. Smart investors pull up stakes only take over assets that have domineering NPVs and testament start out to increase the NPV of their investments. The rate of elapse accredited from an investment is the profit divided by the cost of the investment. plus NPV investments leave behind have rates of run off higher than the prospect cost. This gives an alternate investment decision rule. erect investments are those that have rates of echo higher than the probability cost. This prospect cost can be inferred from the capital market and is ground on its risk characteristics of the investment.To assess why Net march place leads to damp investment decisions than different criteria, let us start with a review of the NPV approach to investment decision making and then present four other(a)wise widely utilise dance steps. These are the payback period, the reserve rate of authorise, the internal rate of eliminate (IRR) and lucrativeness world power. The beats are low to the NPV and should not, with the qualified expulsion of the IRR, naturally be relied upon to provide extend investment decisions. These measures are commonly utilise in practice.The NPV represents the tax added to the business by the project or the investment. It represents the increase in the market hold dear of the shareowners wealth. so, accepting a project with a commanding NPV give eviscerate the stockholders better off by the derive of its NPV. The NPV is the conjecturally correct method to u se in most situations. otherwise measures are middle-level because they often give decisions different from those addicted by future(a) the NPV rule. They will not serve the surpass interests of the stockholders (Brealey, 2002).To compute NPV we should first of all forecast the additive cash flows generated by the project and act upon the appropriate discount rate, which should be the opportunity cost of capital. Then take the sum of the present set (PV) of all the cash flows generated by the investment. NPV = PV of cash inflows initial investment. To shake off decision on investment, we should accept projects with NPV greater than zero and for in return exclusive projects, accept the project with the highest NPV, if the NPV is positive. The NPV represents the observe 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 (Brea ley, 2002).The NPV approach correctly accounts for the duration value of money and adjusts for the projects risk by using the opportunity cost of capital as the discount rate. and so, it intelligibly measures the increase in market value or wealth created by the project. The NPV of a project is not affected by packaging it with some other 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 projects value (Ross, 2002).Payback Period. The payback period is simply the time taken by the project to return your initial investment. The measure is truly touristed and is widely utilize it is also a flawed and fallible measure. It is simple to calculate and easy to comprehend. However, payback period has very limited frugal meaning because it ignores the time value of money and the cash flows later on the payback period. It can be in conformable and the grazeing of projects may be changed by packagin g with other projects.Discounted payback is a change interpretation of the payback measure and uses the discounted cash flows to compute 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 all the similar prevail. It is also not simple anymore (Investment Criteria). sacred scripture put of Return (BRR). This is a rate of return measure ground on accounting payment and is delimitate as the ratio of obligate income to book assets. Accounting earnings are report by firms to the stockholders and the book return measure fits in with the reported earnings and the accounting procedures use by firms.However, the measure suffers from the serious drawback that it does not measure the cash flows or economic gainfulness of the project. It does not pass the time value of money and gives too much angle to distant earnings. The measure depends on the pickax of depreciation method and on other accounting conventions. BRR can give inconsistent ranking of projects and rankings may be alter by packaging. There is very little relationship betwixt the book return and the IRR. (Brealey, 2002).Internal ar throw away of Return (IRR). IRR is defined 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 reciprocally exclusive projects, IRR can give incorrect decisions and should not be apply to rank projects. If one must use IRR for mutually exclusive projects, it should be through by calculating the IRR on the discrepancys surrounded by their cash flows (Ross, 2002). p ositivity Index. Occasionally, companies impudence imagery constraint or capital confine. The amount available for investment is limited so that all positive NPV projects cannot be accepted. In such cases, stockholder wealth is maximized by taking up projects with the highest NPV per dollar sign of initial investment. This approach is facilitated by the positivity might (PI) measure. Profitability magnate is defined as NPV/Investment. The decision rule for profitability advocate is to accept all projects with a PI greater than zero.This rule is equivalent to the NPV rule. The modified rule use in the case of capital rationing is to accept projects with the highest profitability big businessman 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 election constraint is on some other desires, the profitability index needs to be modified to measure the NPV per unit o f the resource that is rationed. The profitability index cannot cope with mutually exclusive projects or where one project is contingent on another (Brealey, 2002).Thus, equivalence NVP with other criteria we can assert that NPV is top hat 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 projects 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 use to achieve this selection.However, the other criteria for the evaluati on of projects are found to be popular in practice. If using them, we should farm sure we use them in the outgo possible 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 pitch-dark than using the wrong(p) appraisal technique. hard cash flow forecasts are difficult to make and can be expensive. It does not make sense to bollocks the forecasts by using an inferior method of evaluation.ReferencesBrealey, Richard A. & Myers, Stewart C. (2002). Principles of Corporate Finance, seventh ed. Chapters 5 6. Irwin/McGraw-Hill Book Co.Investment Criteria, Chapter 9. incoming to Finance. COMM 203 Homepage. College of Commerce, University of Saskatchewan, 2004 from http//www.commerce.usask.ca/faculty/loescher/Commerce203/CapitalBudgeting/Investment_ Criteria.pptRoss, S., Westerfield, R., Jordan, B. & Roberts, G. (2002). rudiments of Corporate Finance, quaternary Edition. McGraw-Hill Ryerson Limited.Net Present ValueCritics 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, concord one interviewee, the application of quantitative tools is not plausible.Therefore, companies tend to apply the rule of thumb methods rather than standardised quantitative models. The plea 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) derogate froms the semipermanent benefits that traditional financial appraisals assume a far too static view of future industrial activity, under-rating the effects and rate 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 prudence control often employed by large organizations compound the bias against those investments which, although expensive, describe rewards full of life for long-run viability. The first income tax return is a criticism of financial technique the next twain are criticisms of the way in which business operations are modelled and the last is an anaesthetize of organizationalc ontrol and behavior. * We show that the criticisms directeda traditional appraisal methods may to some consequence be based on misconceptions of the financial models and the ways in which they are best used * A similar objection is raised to the use of NPV and IRR. The claim is that discounting future cash benefits under-emphasizes the future benefits of new technology. This problem may be exacerbated by the application of risk premia to the discount rate. New echnology is off-key to be riskier than that which has been well established, Why DCF are bad for business and why business schools should obturate using it * The assumptions related to DCF are increasingly enough so sharp from business public that its continued use should come with the adjacent warning, This financial heed technique is unassured to your business. * DCF as a capital investment appraisal tool suffers from a number of major limitations. These limitations admit its narrow perspective, elimination of non-financial benefits, overemphasis on the short-term, imperfect assumptions about the position quo, inconsistent intercession of inflation, and promotion of nonadaptive/cheating behaviour. old authors, including Hastie (1974) Ramasesh an d 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 integrity a limitation of the substance abuser 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 discourse of inflation, the overemphasis on the short-term, bad assumptions about the locating quo alternative, the adoption of a narrow organisational perspective, and manipulative and cheating behaviour are again all mistakes of the user. charge the difficulty of including non-financial benefits is seen as a lack of the financial analysts imagination rather than an inbred shortcoming of the technique. To help overcome the problems of DCF for capital investment decision-making, proponents of re al options theory have argued for the tandem use of the Black and Scholes (1973) model and DCF. The problem with DCF, and which cannot be overcome by its real options complement, occurs when selective information is not fond or quantifiable. non only do these occasions observe quite frequently, but also they give-up the ghost increasingly common as the decision moves from the operationally mundane to the strategically critical.The missapplication of capital investment appraisal techniques * Surveys of capital budgeting practices in the UK and USA develop a trend towards the increased use of more advanced investment appraisals requiring the application of discounted cash flow (DCF) techniques. Several writers, however, have claimed that companies are underinvesting because they use ormisinterpret DCF techniques. * the only acknowledgment we can think of for using the accounting rate of return method is because top management deal that reported profits have an fix on how fin ancial markets evaluate a company. This is further reinforced in many companies by linking management rewards to short-term financial accounting measures. Thus a projects equal on the financial accounting measures used by financial markets would appear to be a factor out that is taken into account within the decision-making process. Dimson and marsh (1994) have expressed concern that many UK companies may be using besides high discount rates to judge 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 study 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 primari ly with the accounting based measures. Project decision-making in most of the case study companies is found decentralized, which provides the benefits of teamwork in project management. * In footing of appraisal model selection, however, the result is heterogeneous. around companies prefer to apply combined methods of appraisal. analogous methods of evaluation are no use 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.This 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 technique s and should never be used alone. NPV and IRR are appropriate ways of valuing future cash-flows. either bias in their application will be ascribable to a authoritative 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.W 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 t o face this complexity in the capital-investment process is likely to lead to bias against change. * 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 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 scissure in .. UK The prospect results indicate that UK corporations have increasingly adoptive prescribed casebook financial analysis. The stage has now been reached where only a humble minority do not make use of discounted cash flows, formal risk analysis, ppropriate infl ation qualifying and post-auditing. However, managers continue to employ simpler rules-of-thumb techniques. There has not, in general, been a commutation 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, emotional state must be lived forward but can only be tacit 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.To work in this manner, however, requires the relevant cash flow information 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 ant e evaluation. Only after the decision is made does useful data likely set about available. The condition expound here is well captured in the lyrics of the drum roll Stones song You burn downt eer Get What You desire You cant always get what you want still if you try sometimes, well you might find You get what you need. When it comes to matters that in reality matter, DCF and real options theory fail to solve us.Instead, they sap managers brawniness by focusing their attention on Paretos minuscule many at the expense of his vital few. In the end, managers end up absent the forest in their search for the non-existent trees. It is time that as educators, we rediscovered the vital few and culled out the trivial many topics that have crept into our quarrel outlines. DCF should be one of the first topics we contrive or at a tokenish drastically range back. It is not only a indigenous example of the trivial many, but it is a potential hazard to firms that use it for decis ions that affect firm strategy. Do I hear any other offers? The missapplication of capital investment appraisal techniques The use of conservative cash flow forecasts, combined with the incorrect treatment of nflation and excessive discount rates detect in the prospect suggests that many UK organizations may be rejecting utile investments. Given these problems it could be argued that DCF procedures should be derelict or given little weight in long investment decisions. We potently disagree. DCF procedures should not be ignored or relegated in vastness merely because they might be used incorrectly. Instead, decisionmakers should recognize potential problems and be on the lookout to ensure that the financial appraisal is performed correctly. CRITICS TO retribution PERIOD Capital inv appraisal of new technologies Problems, misconceptions and research directionsThe objection to payback methods is that they ignore all cash flows after the in demand(p) 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 be awaiting of comment. 5 Payback can be insensitive to large variation among projects (in terms of their cash flows). 6 Payback methods are simple rules of thumb. Their attraction is their simplicity, and robustness for making judgements on perhaps optimistic costings and uneasily 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.