Net present value: the illusion of certainty

McSweeney, Brendan

doi:10.1002/jsc.746

Cited by 15 publications

(8 citation statements)

References 14 publications

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“…According to Nichols, Slender, and Luehrman (1994), the intent of the Research Planning Model as used by Merck & Company, Incorporated, is to use probability distributions to produce a range of various results that will be used to forward discussion and decision-making. McGrath (1997) (McSweeney, 2006). Capital Budgeting tools employ discrete mathematical techniques that assume a linear and predictable relationship exists between managerial decisions and the performance of a venture.…”

Section: Sources Of Real Options Emanate From Existing Investments (Smentioning

confidence: 99%

Interfaces for enterprise valuation from a real options lens

Tan

2018

Strategic Change

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Variables that expand real options models provide interfaces by which entrepreneurs may view prospective ventures, or resources. Factors affecting real option values extend from the external environment of a venture and are forms of various terms of business between entrepreneurs, the venture, and the external environment. The identification of interfaces increases the resulting value of a real option and provides entrepreneurs information by which to structure ventures that extract value from arbitrage and innovation opportunities.

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Section: Sources Of Real Options Emanate From Existing Investments (Smentioning

confidence: 99%

Interfaces for enterprise valuation from a real options lens

Tan

2018

Strategic Change

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“…Hence, the method provides values under the assumption of a static and certain world (McSweeney 2006). McCloskey (1991) raises caveat over the seeming sureness and precision of economic models.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

A real options model for loan portfolios of actively traded Philippine universal banks

Tan

Trinidad

2018

J Glob Entrepr Res

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This study applies Real Options Theory to banking in the environment of actively traded Philippine Universal Banks. These banks exist in an environment of imperfect information with regard to lending, and a country where credit scarcity impedes the growth and performance of entrepreneurial activity. We investigate the option premiums of loan portfolios that depict managerial flexibility with investment strategy. A Real Options Model that considers both the strategies to lend and to idle shows that smaller lending institutions will value loans higher than their larger competitors. From the model, the need to maintain smaller variances in loan portfolio returns constrains manager flexibility. Option premiums in the Philippines exhibit sensitivity to information asymmetries. In these findings, this discussion forwards three propositions and their implications. Furthermore, this paper discusses the value of a hedging portfolio to counter risks from information asymmetry. Hence, this paper differs from many models in the existing literature that focus just on the value of the call option, the value of expansion or growth.

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“…It is suggested that the real problem McSweeney (2006) highlights lies with the approach of management to forecasting this range of variables and the critical objectivity which the forecasting capability of the organization systems permits. Even if the final stage of the NPV calculation was dispensed with, the basic causes of forecasting inaccuracy and lack of managerial judgement would still be present.…”

Section: Forecasting and Evaluationmentioning

confidence: 99%

“…McSweeney (2006) reminds us of Napoleon's tempestuous visit to Russia in 1812. There was another visitor to that country somewhat earlier, whose experience was also most illuminating.…”

Section: Introductionmentioning

confidence: 99%

Net present value: blame the workman not the tool

Connor

2006

Strategic Change

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᭹The suggestion that use of the net present value (NPV) rule in major investment decisions induces illusions of certainty and encourages over-confidence on the part of users is contested. In the event that poor decisions are made when the NPV rule has been used, it is argued here that the causes will be behavioural and competence-centred rather than technique-based. ᭹ The argument is advanced that the NPV rule is an important rational evaluation technique that provides astute and numerate managers and directors with important economic information and satisfies the demands of the investing community for a wealth creation-based criterion for strategic decisions.

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Net present value: the illusion of certainty

Abstract: ᭹Too many fashionable strategic change 'solutions' suppose that uncertainty can be eliminated. This paper considers one such technique -net present value -and rejects its claimed ability to effectively determine the profitability of major future investment.

Cited by 15 publications

References 14 publications

Interfaces for enterprise valuation from a real options lens

Interfaces for enterprise valuation from a real options lens

A real options model for loan portfolios of actively traded Philippine universal banks

Net present value: blame the workman not the tool

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