Pitfalls in evaluating risky projects.

Recent critics of American businesses are wont to claim that our managers rely too heavily on a few financial techniques in weighing major investment decisions. Calculation of discounted cash flows, internal rates of return, and net present values, say the critics, is inherently biased against long-term investments. According to the authors of this article, the technicians, not the techniques, are the problem. Discounting procedures are not inherently biased if management sets realistic hurdle rates and examines carefully its own assumptions. Unfortunately, many DCF analyses of risky projects are overly simplistic and ignore three critical issues that managers and decision makers should consider: the effects of inflation, the different levels of uncertainty in different phases of a project, and management's own ability to mitigate risk. [ABSTRACT FROM AUTHOR]