Corporate Finance and Governance Essay Example | Topics and Well Written Essays - 2500 words

Corporate Finance and Governance - Essay ExampleIt has long been sleep withd that the recognition of jeopardize is an important component in heavy(p) budgeting decisions. The future is uncertain and investment appraisal techniques that fail to recognise this fact will almost certainly lead to incorrect conclusions and erroneous recommendations. (Brookfield, 1995)In a longitudinal survey of capital budgeting practices of large UK companies between 1975 and 1992, substantial increase in the usage of discounted cash run (DCF) and risk appraisal techniques were reported. Despite the increased usage of the more theoretically sound discounting techniques, several(prenominal) writers in both the UK and US have claimed that companies atomic number 18 underinvesting because they misapply or misinterpret DCF techniques. It has been asserted by several writers that firms are guilty of rejecting worthwhile investments because of the improper treatment of inflation in the financial appraisal . Many firms are understating NPVs and IRRs because of the incorrect treatment of inflation and the use of excessively high discount rates. Concern has also been show by various commentators that more companies are failing to invest in advanced manufacturing technologies (AMT) as fully as they should. Financial appraisal techniques have been cited as a major reason for the under-investment in rising manufacturing technology. DCF procedures should not be ignored or relegated in importance merely because they might be employ incorrectly. Instead, decision-makers should recognize potential problems and be careful to ensure that the financial appraisal is performed correctly. (Colin and Mike, 1986)In a introduction in which information is not costlessly and symmetrically available to all economic agents, corporate project choices do not abide by the golden rule that all positive NPV projects should be accepted. In a sense, this is whatsoeverwhat unsettling because it is difficult to prescribe simple rules for managers, and there has been little normative research into optimal capital allocation policies in different types of informationally constrained environments. However, the contemporary research highlights the pitfalls of policy-oriented discussions about corporate investment behavior and managerial compensation packages that rely on the prescriptions of the traditional, symmetric-information paradigm of capital budgeting and financing. The research done to date indicates that many interesting things can happen under asymmetric information, none of which may be irrational, but some of which could be deleterious to the shareholders welfare. (Thakur, 1993)Given these observations about investment appraisal techniques and DCF techniques, in particular, this report aims to assess the feasibleness of using traditional investment appraisal techniques, while incorporating real-time variables such as risk and uncertainties. In particular, the report focuses o n NPV as a basis for capital budgeting and evaluates how the concepts of risk-adjusted discount rates and sensitivity compendium can bolster traditional NPV estimation and thus provide business managers with realistic and elastic options when it comes to assessing the suitableness and profitability of a particular investment or project. Accordingly, themanagement approach should not be especial(a) to using a fixed number of investment appraisal techniques rather they should be more flexible while appraising the gains from a particular investment.