Operations Management: Processes and Supply Chains, 12th Edition

Using Judgment with Financial Analysis

The precision and analytical detachment that come from using the NPV, IRR, or payback method can be deceiving. In fact, U.S. business has been accused of managing by the numbers, with a preference for short-term results from low-risk projects. Part of the problem lies with managers who are on the fast track to the top of their organizations. They occupy a rung on the ladder for a short time and then move up, and so they perceive it to be in their career interests to favor investments that give quick results. They establish short paybacks and high hurdle rates. They ignore or forgo long-term benefits from technological advances, innovative product plans, and strategic capacity additions. Over the long run, ...