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A commentary on “Why DCF capital budgeting is bad for business and why business schools should stop teaching it”

Adler (2006) makes the mistake of singling out one particular decision-making tool for criticism when, broadly speaking, the same criticisms can be applied to any or, indeed, all of the available alternatives. This Commentary is not going to argue that DCF is bound to provide correct decisions or even that it is always going to be appropriate to use it. Despite the criticisms of DCF as a measurable and reportable value (Rosenfield, 2003), other writers have reiterated its theoretical robustness (Shrieves and Wachowicz, 2001). I will argue that the time value of money is a reality, no matter how difficult that reality might be to measure ahead of times. Whilst it may not be suitable for financial reporting, DCF provides us with an invaluable tool for understanding value or worth. Furthermore, it is a concept that is still widely used, in one form or another, in practice (Akalu, 2003) Some of the arguments in the paper are fundamentally flawed. For instance, it is stated that DCF is ‘unlikely to be effective’ in making strategic decisions such as what a company’s core activities should be. It is difficult to dispute this assertion but the fact that some decisions cannot be made using DCF does not invalidate it as a decision tool. DCF would not aid in the choice of a new CEO from a shortlist but that still does not invalidate it for other purposes. It is difficult to see how any decision can be made without some view as to what might happen in the future. Many decisions that turn out to be sub-optimal are made by using the best available information in the best possible way whilst occasionally the opposite will apply and a decision made in an arbitrary and unstructured way will turn out to be a very happy one. Lack of data has to result in decisions being more difficult to make but that does not mean that the techniques applied are, in themselves, less robust. As Willison (1999) points out, ‘The critics of discounted cash flow analysis often seem to criticize the results of the model rather than the fundamentals of the process itself’ (p. 76). Similarly, Drury and Tayles (1997) report that many UK companies can be seen to be misusing DCF. So far as Letter from America is concerned, the decision to broadcast had absolutely nothing to do with future cash flows and it was not an investment. Most decisions we make each and every day are of a similar type and DCF is similarly inappropriate as a Accounting Education: an international journal Vol. 15, No. 1, 13–15, March 2006