Why Dcf Is Bad for Business
Accounting Education: an international journal Vol. 15, No. 1, 3 –10, March 2006
Why DCF Capital Budgeting is Bad for Business and Why Business Schools Should Stop Teaching it
RALPH W. ADLER
University of Otago, New Zealand
Introduction As educators, we are constantly making decisions about course content. Each year, as we begin our preparations for writing our new or updated course outlines, such questions as what topics to include, modify, or exclude, are contemplated and re-contemplated. When making these decisions, an implicit or explicit decision is made on what is or is not ‘essential.’ Exactly what constitutes an essential topic derives partly from what is mandated, partly from what is institutionalised, and partly from what twinkles or pales ‘in the eye of the beholder.’ Topic mandates primarily come from the professional accounting bodies with which university accounting departments maintain links. These professional bodies exert a strong influence on course content. Any university accounting department that hopes to attain/retain the professional body’s accreditation must show evidence that it is meeting the Body of Knowledge espoused by and generally encapsulated in the professional body’s course outline(s). The obvious consequence is that a substantial amount of the course content is mandated and driven by the professional bodies. Institutionalization serves to guide course content in two main ways. First, educators, either through a process of formal or informal benchmarking, frequently monitor developments in the course topic coverage of their peers and colleagues. Agreement converges around some belief about ‘best practice,’ which is then accepted and adopted into the course content. A second way in which institutionalization occurs is through textbook adoption. When a course textbook is specified, a resulting commitment is made to a set of topics. The fact that there are usually a small number of popular textbooks, featuring a similar set of
Why DCF Capital Budgeting is Bad for Business and Why Business Schools Should Stop Teaching it
RALPH W. ADLER
University of Otago, New Zealand
Introduction As educators, we are constantly making decisions about course content. Each year, as we begin our preparations for writing our new or updated course outlines, such questions as what topics to include, modify, or exclude, are contemplated and re-contemplated. When making these decisions, an implicit or explicit decision is made on what is or is not ‘essential.’ Exactly what constitutes an essential topic derives partly from what is mandated, partly from what is institutionalised, and partly from what twinkles or pales ‘in the eye of the beholder.’ Topic mandates primarily come from the professional accounting bodies with which university accounting departments maintain links. These professional bodies exert a strong influence on course content. Any university accounting department that hopes to attain/retain the professional body’s accreditation must show evidence that it is meeting the Body of Knowledge espoused by and generally encapsulated in the professional body’s course outline(s). The obvious consequence is that a substantial amount of the course content is mandated and driven by the professional bodies. Institutionalization serves to guide course content in two main ways. First, educators, either through a process of formal or informal benchmarking, frequently monitor developments in the course topic coverage of their peers and colleagues. Agreement converges around some belief about ‘best practice,’ which is then accepted and adopted into the course content. A second way in which institutionalization occurs is through textbook adoption. When a course textbook is specified, a resulting commitment is made to a set of topics. The fact that there are usually a small number of popular textbooks, featuring a similar set of
References: Adler, R. (2000) Strategic investment decision appraisal techniques: the old and the new, Business Horizons, 43(6), pp. 15 –22. Adler, R. and Milne, M. (1997) Translating ideals into practice: an examination of international accounting bodies’ calls for curriculum changes and New Zealand tertiary institutions’ assessment practices, Accounting Education: an international journal, 6(2), pp. 1–16. 10 R. W. Adler Bernstein, P. (1996) The new religion of risk management, Harvard Business Review, 74(2), pp. 47– 51. Black, F. and Scholes, M. (1973) The pricing of options and corporate liabilities, Journal of Political Economy, 81(3), pp. 637 –654. Carr, C. and Tomkins, C. (1996) Strategic investment decisions: the importance of SCM (a comparative analysis of 51 case studies in UK, US, and German companies, Management Accounting Research, 7(2), pp. 199 –217. Dean, J. (1951) Capital Budgeting (New York: Columbia University Press). Hastie, K. L. (1974) One businessman’s view of capital budgeting, Financial Management, 3(4), pp. 36– 44. Hayes, R. and Abernathy, J. (1980) Managing our way to economic decline, Harvard Business Review, 58(4), pp. 66 –77. Hayes, R. and Garvin, D. (1982) Managing as if tomorrow mattered, Harvard Business Review, 60(3), pp. 71–79. Kaplan, R. (1986) Must CIM be justified by faith alone?, Harvard Business Review, 64(2), pp. 87–95. Mintzberg, H. (1996) Musings on management, Harvard Business Review, 74(4), pp. 61–67. Porter, M. (1996) What is strategy, Harvard Business Review, 74(6), pp. 61–78. Ramasesh, R. and Jayakumar, M. (1993) Economic justification of advanced manufacturing technology, Omega International Journal of Management Science, 21(3), pp. 289–306. Simon, H. A. (1957) Models of Man: Social and Rational (New York: John Wiley & Sons). Simmonds, K. (1981) The fundamentals of strategic management accounting, paper presented to the Institute of Cost and Management Accountants, Technical Symposium, Pembroke College, Oxford, 6– 8 January. Sylwester, M. and Witosky, T. (2003) Athletic spending grows as academic funds dry up, USA Today, 18 February. Williams, J. (1938) The Theory of Investment Value (Cambridge, MA: Harvard University Press).