Rationality and Investment Appraisal

Several writers have attempted to explain why the analytical approaches of economics and operations research do not seem to have been widely adopted by companies. This paper is an attempt to explain a particular example of this general phenomenon; it was stimulated by recent research at Manchester University which indicated that many large British companies do not use rigorous investment appraisal techniques. Indeed, whilst American observers concentrate on explaining why firms in the United States do not explicitly take account of the riskiness of future cash flows, it would seem that many UK firms fail to even deal with the time value of money in evaluating investment projects. Instead UK firms seem to relegate formal investment appraisal techniques, such as internal rate of return or present value analysis, to a role secondary to ‘judgement.' The results of this recent research deserve investigation. The methods used to select investment projects help to determine both the efficiency with which scarce resources are used and the effectiveness of Government action to stimulate or restrain national investment