Abstract
The quest for better investment decisions, especially under conditions of low prices, has stimulated interest in new methods for quantifying and managing projects. Journals are full of articles outlining the benefits of options theory, decision-trees, contingent claims analysis, simulations, portfolio theory, etc. Each method corrects a specified, well-documented deficiency in traditional valuation procedures.
This paper summarizes the recent criticisms of traditional methods, especially the gap between individual project valuation methods and the strategic objectives of the organization. After reviewing the limitations of traditional discounted cash flow (DCF) analysis, including NPV, IRR, etc., we seek to outline a more comprehensive understanding of DCF that corrects the inherent contradictions at work in most organizations, especially with the tendency to emphasize short-run objectives at the expense of longer-term, strategic investments.
