Two points will be assigned to companies that

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Unformatted text preview: ge of a particular tool or concept, in others its use may well be commonplace, and the technique or idea may be regarded as a main component of the organisation’s investment appraisal process. Following these observations, it is possible to rank companies according to the extent of their usage of decision analysis tools and 161 philosophies. In the ranking, companies that use many decision analysis tools and ideas will score more highly than those organisations that choose not to use decision analysis. The decision analysis techniques and concepts are listed below. For ease of presentation the tools and ideas are described roughly according to their level of complexity (and, hence, ease of implementation), sophistication of output and extent to which their usefulness to the industry is acknowledged in the literature. For each technique and concept, an indication is given of how the companies will be graded and ranked on this criterion. Where necessary a brief outline of the tool or idea is also provided. Techniques/concepts 8-13 used the same scoring system for ranking companies. This is explained in the discussion of tool 13. 1 Quantitative analysis. This is used here to refer to the calculation by analysts of decision-making criteria such as payback, rate of return (Buckley, 2000) or discounted profit to investment ratio (Higson, 1995). The calculation of these criteria are recognised by many analysts to be the most basic type of investment appraisal companies can undertake since the measures are simple to calculate, include no explicit recognition of the existence of risk and uncertainty and hence, their output is primitive (for example, Newendorp, 1996). Two points will be assigned to companies that calculate these criteria routinely in their investment appraisal process. One point will be given for partial implementation, and zero for non-usage. 2 Holistic view. Chapter 5 indicated that for companies to make ‘proper’ decisions it is essential that they adopt a holistic view of the total cumulative net effect of the consequences of the decision currently under consideration. For example, for any upstream investment decision, there must be an estimate of the timing and cost of the abandonment of the facilities and the cost and timing implications of any environmental protection measures that may need to be taken. For a full discussion refer to Ball and Savage (1999). The need for upstream organisations to adopt a holistic perspective is well documented (Simpson et al., 2000; Newendorp, 1996) and simple to achieve. Those companies that adopt a holistic view of the total cumulative net effect of the consequences of the decision being 162 taken will be assigned two points. The companies that recognise the necessity to do so but mostly do not will be given one point. No points will be given to companies that do not recognise the need to take a holistic perspective. 3 Discounted cash flow techniques. As discussed in Chapter 5, the timing characteristics of upstream projects are such that there is an histor...
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