The authors assert that in practice many manage recognize the inherent

The authors assert that in practice many manage

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(2) Errors of estimation. The authors assert that in practice many manage recognize the inherent uncertainties associated with distant cash flows terminal value at a certain point in the project's life. That is, all cash flo term) point in a project's life are embodied in a single amount, called th value." (This terminal value is often estimated as the present value, at the stream of future cash flows that grow, from the terminal point, by a perpetuity. Thus, the value of that stream, at the terminal point is found the assumed growth-rate for the cash inflows from that point forward, i The authors indicate two errors of the above approach: (1) the mathem amplifies estimation errors associated with near-term estimated cash i future stream, to infinity, is a function of the assumed near-term cash i method fails to incorporate the declining competitive situation discusse 2. (a) "Fixed costs" are defined as those costs that, in the short run, do not v underlying activity variable or cost driver. These costs are also referred costs, since they provide a certain amount of capacity or ability to prod are incremental to a decision are relevant to the analysis; for example, captured in an NPV analysis of a proposed investment. starting-point cash cash inflow by the amount "r - g," where r is the dis
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"Sunk costs" are historical ("down-the-drain") costs and, as such, are n decision--thus, for example, these costs will continue regardless of whe organization invests in a certain project. Strictly speaking, these costs a decision-making. (b) In terms of assessing "innovation projects," the authors suggest that in managers err by assuming that the current levels of fixed costs are ade new investment. In their words, these managers assume that "capabilit yesterday's success are adequate for tomorrow's as well." The exampl steel companies can be used here to more forcefully illustrate the unde regarding the adequacy of current levels of investment in support of inn In committing this error, they fail to make the same investments that ne attackers find to be profitable! One possibility for dealing with the above-mentioned problem is to view useable life of the assets being contemplated. While the latter is import depreciation charge (for tax and financial-reporting purposes), the form for determining the strategic value of the project being assessed. In this consistent with what the authors refer to as valuing a stragtegy rather t 3. The authors suggest that many managers focus too narrowly on (short-te and earnings-per-share growth metrics, under the assumption that these inherently linked to share price and therefore shareholder value-creation. be attributable to the desire to have a simple, quantitative indicator that is period-to-period and across companies. In part, it may be attributable to some relationship between short-term share values and reported earning results. Thus, the thinking goes, managers are biased against accepting have positive long-term value effects, but negative (or at least adverse) e earnings per share results.
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