Discussion for AD 731 Corporate Finance at Boston University
Table 10-1 from Chapter 10 says it all; page 418 of our text illustrates that 75% of companies use NPV as a quantitative measure, and roughly 79% of CEOs believe rankings based on NPV is the most important factor when allocating capital. When looking further into the paper used for collecting the data from table 10-1 (NBER), the authors found that NPV is used to make capital budgeting decisions in nearly 80% of not for profit firms as well (NBER). This implies that, regardless if a company is trying to make personal profit or serve a cause, that all industries embrace the NPV capital allocation principle when making financial decisions.
For example, consider how the Pentagon is currently putting military pay on the chopping block (NYTimes). Analysts estimate that the Pentagon is obliged to find over $1 Trillion over the next 10 years to pay for compensation (pay, retirement benefits, health care, housing allowances, etc.) (NYTimes). The Department of Defense has a budget of over $600 Billion per year (FactSheet), and the cost of their primary investment – personnel – has doubled since 2001 (the average cost of a US soldier has doubled since 2001; NYTimes). Dealing with an extremely large sum of money, the Pentagon is applying the NPV technique by comparing the present value of money today to the present value of money in the future.
(FactSheet) http://www.defense.gov/news/Fact_sheet_budget.pdf.
(NBER) http://www.nber.org/papers/w17370.pdf?new_window=1.
(NYTimes). November 2013. http://www.nytimes.com/2013/12/01/opinion/sunday/putting-military-pay-on-the-table.html?_r=0.
