The Misapplication of Capital Investment Appraisal Techniques

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The misapplication of capital investment appraisal techniques
Drury, Colin, Tayles, Mike. Management Decision. London: 1997. Vol. 35, Iss. 2; pg. 86

Abstract (Summary)
An examination of the surveys of capital budgeting practices that have been undertaken during the past 20 years in both the UK and US reveals a trend towards a continuing increase in the use of more sophisticated capital budgeting techniques. In a longitudinal survey of capital budgeting practices of large UK companies between 1975 and 1992, substantial increase in the usage of discounted cash flow (DCF) and risk appraisal techniques was reported. Despite the increased usage of the more theoretically sound discounting techniques, several writers in both the UK and US
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This paper consists of six sections. The research method is briefly described in the first section. This is followed by a section that focuses on the use of financial appraisal techniques. The third section describes the survey findings relating to the treatment of inflation and the fourth is concerned with the use of excessive discount rates. In the fifth section we focus on the appraisal of investments in advanced manufacturing technologies. We conclude with some suggestions for avoiding the pitfalls discussed in this paper.

Research method

The findings from this paper are derived from a questionnaire survey mailed to qualified management accountants in 866 UK manufacturing organizations with a five year average sales turnover exceeding Pounds 10 million. A total of 303 usable responses were received, representing a response rate of 35 per cent.

Appropriate response bias tests were performed with respect to size and industry classification. There was no evidence of any response bias. The responses to each question were analysed by size (using annual sales turnover) and the principal activities of each business unit. We were particularly interested in comparing the responses of the largest and smallest organizations . The analysis by size is therefore based on a comparison of the 46 largest organizations
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