Published by:
Harvard Business Publishing
Length: 9 pages
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Abstract
Critics of American business claim that U.S. managers rely too heavily on a few financial techniques to weigh major investment decisions. Calculation of discounted cash flows, internal rates of return, and net present values, say critics, is inherently biased against long-term investments. But according to the authors, DCF procedures can work if management sets realistic hurdle rates and examines carefully its assumptions. Decision makers need to consider three critical issues: the effects of inflation, the different levels of uncertainty in different phases of a program, and management''s own ability to mitigate risk.
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Abstract
Critics of American business claim that U.S. managers rely too heavily on a few financial techniques to weigh major investment decisions. Calculation of discounted cash flows, internal rates of return, and net present values, say critics, is inherently biased against long-term investments. But according to the authors, DCF procedures can work if management sets realistic hurdle rates and examines carefully its assumptions. Decision makers need to consider three critical issues: the effects of inflation, the different levels of uncertainty in different phases of a program, and management''s own ability to mitigate risk.