CP

1. Every responding firm used some type of DCF method. In 1955, a similar study re-
   ported that only 4 percent of large companies used a DCF method. Thus, large
   firms’ usage of DCF methodology increased dramatically in the last half of the
   20th century.


2. The payback period was used by 84 percent of Bierman’s surveyed companies.
   However, no company used it as the primary method, and most companies gave the
   greatest weight to a DCF method. In 1955, surveys similar to Bierman’s found that
   payback was the most important method.


3. In 1993, 99 percent of the Fortune 500 companies used IRR, while 85 percent used
   NPV. Thus, most firms actually used both methods.


4. Ninety-three percent of Bierman’s companies calculated a weighted average cost of
   capital as part of their capital budgeting process. A few companies apparently used
   the same WACC for all projects, but 73 percent adjusted the corporate WACC to
   account for project risk, and 23 percent made adjustments to reflect divisional risk.


5. An examination of surveys done by other authors led Bierman to conclude that
   there has been a strong trend toward the acceptance of academic recommenda-
   tions, at least by large companies.

A second 1993 study, conducted by Joe Walker, Richard Burns, and Chad Denson

(WBD), focused on small companies.^15 WBD began by noting the same trend toward

the use of DCF that Bierman cited, but they reported that only 21 percent of small

companies used DCF versus 100 percent for Bierman’s large companies. WBD also

noted that within their sample, the smaller the firm, the smaller the likelihood that

DCF would be used. The focal point of the WBD study was whysmall companies use

DCF so much less frequently than large firms. The three most frequently cited rea-

sons, according to the survey, were (1) small firms’ preoccupation with liquidity, which

is best indicated by payback, (2) a lack of familiarity with DCF methods, and (3) a be-

lief that small project sizes make DCF not worth the effort.

The general conclusion one can reach from these studies is that large firms should

and do use the procedures we recommend, and that managers of small firms, espe-

cially managers with aspirations for future growth, should at least understand DCF

procedures well enough to make rational decisions about using or not using them.

Moreover, as computer technology makes it easier and less expensive for small firms to

use DCF methods, and as more and more of their competitors begin using these

methods, survival will necessitate increased DCF usage.

What general considerations can be reached from these studies?

The Post-Audit

An important aspect of the capital budgeting process is the post-audit,which involves

(1) comparing actual results with those predicted by the project’s sponsors and (2) ex-

plaining why any differences occurred. For example, many firms require that the

operating divisions send a monthly report for the first six months after a project goes

into operation, and a quarterly report thereafter, until the project’s results are up to

The Post-Audit 279

(^15) Joe Walker, Richard Burns, and Chad Denson, “Why Small Manufacturing Firms Shun DCF,” Journal of
Small Business Finance,1993, 233–249.

The Basics of Capital Budgeting: Evaluating Cash Flows 277