This chapter has argued that discounted cash-flow investment appraisal methods (i.e.

NPV
and IRR) are superior to simplistic investment appraisal methods (i.e. payback and return on
capital employed) and this is widely accepted. Companies using discounted cash flow (DCF)
investment appraisal methods should therefore perform better than those using simplistic
methods. Empirical research on this question has produced mixed results, however, and Haka
et al. (1985) found evidence that adoption of sophisticated investment appraisal methods may
not necessarily lead to improved performance. Since most companies now use more than one
investment appraisal method (see Section 7.6.1), it is in practice difficult to isolate any
beneficial effects that may be solely due to using DCF methods. This does not invalidate the
academic superiority of NPV and IRR, however. As illustrated by Vignette 6.1, it may be
difficult to find values to use in a DCF analysis, such as the discount rate.

We can now summarise the arguments in favour of the net present value method of
investment appraisal:
1 The NPV method gives correct advice about mutually exclusive projects.
2 The NPV method can accommodate non-conventional cash flows, when the internal rate of
return method may offer multiple solutions.