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Trust Discount Pay - Back (Outlook of a Practitioner)

The Article, Published by Sabyasachi Sengupta in Institute of Company Secretaries of India (ICSI), XLIII(02), 2013, 148-150, 2013

It is a well recognized and well established fact that Discounted Cash Flow (DCF) based models are regarded as ideally suited models while evaluating capital investment/project appraisal decisions. The DCF tools normally in use include (amongst others,) the Net Present Value (NPV),  Internal Rate of Return (IRR), Discounted Pay Back (DPB), Profitability Index (PI), Adjusted Present Value (APV) and Modified Internal Rate of Return (MIRR) techniques. Academicians, the world over stresses on NPV and APV (which is conceptually an extension of the NPV rule) as the most preferred models for project appraisal decisions, essentially because they are conceptually and logically sound. However, practitioners often resort to the IRR rule for decision making purposes despite the fact that academicians repeatedly advise them against it because of certain conceptual limitations which are inherent in such IRR modeling. The Discounted Pay Back (DPB) method of investment  appraisal is yet another standard tool used by practitioners while appraising  capital investments although it has been established beyond doubt that DPB rule used indiscriminately does not always  provide the best decision. However, the conceptual limitation inherent  in the DPB rule has not had encouraged the practitioners to shy away from this method of appraisal altogether. Practitioners often resort to DPB while selecting investment options as much as they use the theoretically superior NPV model and the intuitively appealing IRR rule. Such a phenomenon (i.e. practitioner’s preference for the DPB method despite its academic limitations) may be explained once we attempt to study the reasons ( rather the ground realities), which prompts them to resort to DPB method for project, appraisal decisions. In fact, certain crucial practical realities encompassing capital investment decision actually justifies the level of trust the practicing managers still place on DPB method of investment appraisal.