DATA MINING Research Paper Example | Topics and Well Written Essays - 1250 words

DATA MINING - Research Paper Example In fact, the early stages of predictive analytics involve product recommendations and behavioral targeting. Another advantage is the possibility of behavior-based advertising. In order to achieve this, the available data is analyzed to predict the areas which interest each customer and the advertisements of that area are presented to the customer. Yet another area where this predictive analytics can be useful is issues like fundraising for nonprofits. In order to do this, often, companies filter the data to identify donation amounts. Similar is the case of insurance pricing and selection. In fact, it is possible to offer individually tailored insurance packages by analyzing the available data. In addition, it is possible for insurance companies to assess insurance risk using the data. Another area where predictive analytics is highly useful is email targeting. In order to do this, companies identify the nature of the emails each customer is likely to respond to and emails are designe d accordingly. However, one of the most important areas of utilizing predictive analytics is retention of customers. It is possible to identify customer defection and attrition through predictive analytics. This will help in reaching customers immediately and effectively stopping their going away. Admittedly, associations discovery helps businesses in a number of different ways. Associations discovery involves indentifying the relationship that exists between the sales of different things or services. In simple terms, association is the discovery of various association relationships in a set of items or services. First of all, this helps organizations identify the related items a customer is likely to buy so that the customer is offered all the related items from the same company. This helps save the time and effort of the customer and ensures that the customer is retained. In addition, it ensures that companies are enabled to sell more by keeping all those items closer which are of ten sold together. Admittedly, various organizations around the world are effectively utilizing this facility. The first example is Wal-Mart. As Khattak, Khan and Lee (2010) point out, Wal-Mart uses basket analysis and clustering in order to smoothen the business transactions; and this helps the company identify the most sold products, identify the customers based on their purchasing capacity, divide the customers based on their arrival time, and identify the items of major trade. Web mining has its own unique advantages either in the form of selling more products or in the form of reduced costs. The web data collected on customers should be categorized and clustered in order to use the same for various purposes ranging from developing marketing strategies, customer relationships, and competitive analysis. It is possible for a company to utilize usage mining or web log data in order to identify a potential customer and reach out to that customer with a tempting offer. The various fo rms of web mining ranging from structure mining, usage mining and content mining offer considerable amount of marketing intelligence. This results in more personalized strategies from the part of companies, more sales, more satisfied customers and higher customer loyalty and retention. Admittedly, data mining algorithms are likely to err seriously in the real production environment. So, it becomes necessary to check their validity before using them in the real working environment. The first way of validating a particular algorithm

Priciples of Software Engineering Essay Example for Free

Priciples of Software Engineering Essay Describe each law in your own words. Illustrate with a practical example ? Glass’ law â€Å"Requirement deficiencies are the prime source of project failures Coming to my explanation Glass law states that if the basic requirements of the projects is not constructed properly that may leads failure of the project. To achieve goals in the project it plays an vital role and any drawbacks may leads project unsuccessful. Around 20% of all IT project failures were caused by incomplete or badly managed requirements. Example: Technological University-Online Practical Tests In the case of technological university the requirements specifications for the online practical exams had been implemented without consulting students and university staff. This system was designed in such a way that students affliated to that university are write the test test online at the same day and same time. Considering the requirements of the colleges were different an the project objectives were different. This leads to failure of the that project. Boehm’s first law â€Å"Errors are most frequent during the requirements and design activities and are the more expensive the later they are removed†. Coming to my explanation Boehm’s law states that the basic designing of the projects mat leads to errors and miscalculations. The sooner you find a problem, the cheaper it is to fix , otherwise to detect the errors in the project is very expensive or complicated . This law is applicable from midrange systems. Example: City Council – Pay Roll System A city council developed a replacement payroll system believed that users had comprehensive knowledge of all the business requirements. But the current staff or IT team had participated in building the old system they had no knowledge of how it was built. That leads to many errors and it cause project failure. Boehm’s second law â€Å"Prototyping (significantly) reduces requirement and design errors, especially for user interfaces†. Coming to my explanation Boehm’s second law states that by prototype modelling the disigning of the project and errors can be reduced. To design the system the staff will be educated . So that that will increase the usability of the system among users. Example: In a postgraduation course prototype modelling experiments were conducted . Some of them were used requirement driven approach and others are prototyping approach. This will leads to satisfaction for the client compare to all other methods. Davis’ law â€Å"The value of a model depends on the view taken, but none is best for all purposes†. Coming to my explanation Davi’s law states that to describe systems requirements, it is very useful. This model is useful to solve the complicated tasks that other models find that difficult to solve. Example:In a system to solve the problems different methods were implemented. Each task follows their methodolgies to solve the problems. At the end all the methods got different results but there methodologies is useful to solve the problem. Your first task is to describe each software development methodology clearly and completely in your own words. You may use diagrams, examples or UML to help you do this. Waterfall Model : The waterfall model is a sequential software development process, in which progress is seen as flowing steadily downwards through the phases of conception, design, analysis, initiation ,testing and maintenance. This model is used in manufacturing industries and construction industries . It is ; highly structured physical environments in which after-the-fact changes are prohibitively costly, if not impossible. Since no formal software development methodologies existed at the time, this hardware-oriented model was simply adapted for software development. For example, one first completes requirements specification, which after sign-off are considered set in stone. When the requirements are fully completed, one proceeds to design. Spiral Model: The spiral model is a software development process combining elements of both design and prototyping-in-stages, in an effort to combine advantages of top-down and bottom-up concepts. Each phase starts with a design goal and ends with the client reviewing the progress . Analysis and engineering efforts are applied at each phase of the project, with an eye toward the end goal of the project. The spiral model might mean that you have a rough-cut of user elements as an operable application, add features in phases, and, at some point, add the final graphics. The Spiral model is used most often in large projects and needs constant review to stay on target. It can get their hands in and start working on a project earlier. Q3) Using the first four laws of the text, show where these are either implemented or missing in each software development methodology (Total Two). If a law is missing, explain the consequences and suggest how the process might be improved. Water Fall Model Glass’ law Requirement deficiencies are the prime source of project failures. The end users gathered by requirements in waterfall model. It states that the basic requirements of the projects is not constructed properly that may leads failure of the project. The failures were caused by incomplete or badly managed requirements. Boehm’s first law â€Å"Errors are most frequent during the requirements and design activities and are the more expensive the later they are removed†. It basic designing of the projects mat leads to errors and miscalculations. In waterfall model this law cannot be able to correct the errors. This law is not reliable for waterfall model. Boehm’s second law Prototyping (significantly) reduces requirement and design errors, especially for user interfaces†. This law cannot be able to correct the errors in waterfall model. The design phase would be reduced by prototype modelling. Davis’ law â€Å"The value of a model depends on the view taken, but none is best for all purposes†. The purpose of this model is not suitable for this law. Spiral Model Glass’ law â€Å"Requirement deficiencies are the prime source of project failures In waterfall model risk analysis is conducted on the prototype. By this if they need any requirement it will included in next stage. Boehm’s first law â€Å"Errors are most frequent during the requirements and design activities and are the more expensive the later they are removed†. In spiral model each phase starts with a design goal and ends with the client reviewing the progress . The risks were eliminated after number of stages. Boehm’s second law â€Å"Prototyping (significantly) reduces requirement and design errors, especially for user interfaces†. In spiral model it will design the prototype. and construct and design the prototype. The analysis and engineering efforts are applied at each phase of the project.

Competition in the sportswear industry

Competition in the sportswear industry This report is about a competitive analysis watch based on competition in the sportswear industry, dominated by Nike Inc., followed by Adidas and Puma. The article with the title, Competition comes to a Head for World Cup Sponsors was published on The New York Times on 6th June 2010. This report discuss about the competitive strategies adopted by Nike, as the market leader. Porters five forces of competition framework have been used to analyze the competitive advantage Nike has over its rivals. The objective is to understand the aggressive level of competition within the industry and also how firms try to dominate the market, through cost cutting and innovation. Company Background Nike Inc. was founded in 1962 by Bill Bowerman and Phil Knight as a partnership under the name, Blue Ribbon Sports. When Nike co-founder Bill Bowerman made this observation many years ago, he was defining how he viewed the endless possibilities for human potential in sports. He set the tone and direction for a young company created in 1972, called Nike, and today those same words inspire a new generation of Nike employees. Nikes goal is to carry on Bills legacy of innovative thinking, whether to develop products that help athletes of every level of ability reach their potential, or to create business opportunities that set Nike apart from the competition and provide value for our shareholders. Along the way, Nike has established a strong Brand Portfolio with several wholly-owned subsidiaries including Cole Haan, Converse Inc., Hurley International LLC, NIKE Golf, and Umbro Ltd. The mission of Nike is: to bring inspiration and innovation to every athlete* in the world. Nike maintains traditional and non-traditional distribution channels in more than 160 countries targeting its primary market regions: United States, Europe, Asia Pacific, and the Americas (not including the United States). They utilize over 20,000 retailers, Nike factory stores, Nike stores, Nike Towns, Cole Haan stores, and internet-based Web sites to sell their sports and leisure products. Nike Inc. attains their position through quality production, innovative products, and aggressive marketing. Nike acquired Umbro in 2007. This acquisition indeed became the first decisive marketing goal of World Cup 2010. Nike has 10 World Cup contenders including Brazil, Portugal, Netherlands, Australia, Slovenia, New Zealand, U.S.A, Korea Republic, Serbia, and the deal with England and Umbro, which Nike maintains as a separate brand. The England and Umbro deal is the most Lucrative in international soccer, valued 34 million ($ 40.7 million) a year according to Sport+Markt, a research firm. This deal was a new determination for Nike to challenge Adidas, the German soccer apparel powerhouse, on its European home ground. Nikes continuing relationship with Brazil is worth 22 million a year. Competitor Analysis Adidas and Reebok breathing down the companys neck, the heart of the Adidas product line is athletic shoes, but the companys iconic three-stripe logo appears on apparel and other jock accessories. As the No.2 maker of sporting goods worldwide behind Nike, Adidas has inked deals with football and basketball athletes, as well as the New York Yankees, and it serves golfers through its Taylor Made-Adidas Golf. The company operates some 2,200 retail locations under the Adidas and Reebok banners. Adidas, which boasts the official match ball (named Jabulani) for the 2010 FIFA World Cup, expanded its business and breadth when it bought Reebok for some $3.8 billion. Nikes rival PUMA is another leading sport lifestyle company that designs and develops footwear, apparel and accessories. PUMA starts in Sport and ends in Fashion. In soccer, PUMA is the official supplier to 7 world cup teams including defending world champion Italy, Uruguay, Switzerland, Ghana, Algeria, Cote dIvoire and Cameroon. PUMA Vision states that, we are committed to working in ways that contribute to the world by supporting Creativity, Safe Sustainability and Peace, and by staying true to the values of being Fair, Honest, Positive and Creative in decisions made and actions taken. PORTERS FIVE FORCES 1. Barriers to Entry The threat of new entrants to the profit potential of sports accessory and athletic shoe manufacturers is minimized through high entry barriers. Due to large scale production, high cost on research and development and extremely large capital investment on innovation, factories and stores has made Nike able to control its cost and retain performance advantage over emerging competitors. 2. Bargaining Power of customers Relative to the number of firms in the industry there are a large number of buyers in the market with high bargaining power. Therefore in order to increase sales and market share, firms need to continuously market their product and differentiate their brands against competitors. The recent emergence of e-commerce and online shopping has helped enhanced the accessibility and intimacy among consumers. For example, NikeiD allows customers customize and design their own footwear by permitting customers to specify the desired colours and options to personalize the footwear with their name. Brand identity plays a critical role in the buying behaviours, as it offers customers loyalty and trust. 3. Bargaining Power of Suppliers Abundant numbers of input suppliers are available in the sportswear industry. There is little differentiation among the suppliers which makes the suppliers bargaining power low or non -existence. Input items such as Leather, rubber, cotton and plastic are available in large quantities. Nike has a definitive advantage and power over these suppliers when they become dependent on these firms as their means to survive. Nike have standardized their input procedures pertaining to the materials used, their labour force, supplies, services and logistics. Due to global networks of cheap labour on various continents, firms are able to switch between supplies quickly and easily. 4. Threats of substitutes Due to little alternatives to switch between, within the sportswear and athletics footwear industry, buyers propensity to substitute is low. For example: Nike shoes are designed to improve comfort and personal safety during periods of increased movements. The possible substitutes for footwear could be boots, sandals, bear feet or dress shoes, which however cannot be replaced for sporting purposes or for athletics. Hence, there are no real substitutes. 5. Competitive Rivalry within the industry There is countless number of competitors in the global arena for Nike. However not all companies have the power to compete with Nike. But few major competitors such as Adidas and Reebok, Puma, Joma, Legea and Brooks exist. These companies signed up in the World Cup arena are more evenly matched than ever. With 32 teams participating in the world cup, 12 teams including Argentina, France, Germany and the host nation South Africa wore Adidas on them, and Adidas was the official sponsor of the world cup. According to Hartmut Zastrow, executive director of Sport+Markt Adidas is still slightly ahead of Nike, on awareness and they have defended themselves well, but Nike is pushing aggressively. The fat checks from Nike and Adidas have not entirely priced rivals out of the market. With Nike and Adidas playing the equivalent of a possession game, the third-biggest soccer sponsor, Puma, has exploited unexpected openings in its rivals defenses an opportunistic strategy modeled on the playing style of Italy, Pumas biggest sponsorship. Puma is spending an estimated 30 million this year to sponsor teams in the 2010 World Cup, compared with 104 million for Nike and Umbro together and 85 million for Puma was also forward-looking in its recognition of the marketing potential of aligning itself with African national teams, long before South Africa was chosen, in 2004, as the first World Cup host on the continent. In 1997, Puma signed up Cameroon, and it has strengthened its ties to Africa since then. Equipment manufacturers logos are the only branding allowed on World Cup soccer jerseys, in contrast with professional club soccer shirts, which generally also include another prominent sponsor, like a gambling, electronics or car brand. That means even lesser known labels can stand out. Joma, a small Spanish provider of athletic gear, has high hopes for its sponsorship of Honduras. The company expects its sales to rise 40 percent in that country this year and 15 percent in the United States, which has a large Honduran community, a spokeswoman said. Brooks, a U.S. maker of running shoes is supporting Chile. Legea, an Italian provider of sports equipment had signed an agreement to supply uniforms to the North Korean team, which is in the World Cup for the first time since 1966. Self-Evaluation: Nike has planted itself firmly on the global business arena and appears to be a role model for other sportswear rivals. They have proved to be innovative, smart, environmentally friendly, and consistent with their product effectiveness and differentiation. For the company to continuously grow and sustain its competitive advantage, it is essential to invest on innovation and new products development that creates a need for the consumers. Nike appears to be a stylish, comfortable, and a reliable giant supplier with varieties of product line. The most informative part of this assignment was learning about capital investment firm make in order to dominate the market. There is also evidence of Hypercompetiton or rather cut throat competition within the industry amongst the major market challengers. Nikes attempt to snatch Germany away from Adidas, a German brand and the lucrative investments on acquisitions and sponsorship are evidence of desperate challenge for sustaining its dominance i n the market. Conclusion: From equipping athletes with the finest sports equipment in the world to continuously improving their financial performance, Nike dominates its competitors. Despite a changing marketplace for athletic footwear, Nike continues to expand its product lines and marketing reach to become a more powerful global brand. Due to the product differentiation, brand identity has an immediate competitive advantage. Aggressive promotions and advertisements also contribute to the success of Nikes well establishment in the industry. Nike has signed France to a seven-year deal and it will pay the countrys soccer federation more than 40 million a year to maintain hard grounds on its position for the next tournament, in 2014 in Brazil. The agreement will leapfrog France past England, making its shirts the most lavishly sponsored uniforms in international soccer.

Status Confessionis and Social Commentary from the Current Church Ess

Status Confessionis and Social Commentary from the Current Church Throughout my ongoing investigation of the interactions between religious values and social behavior, I have become thoroughly intrigued with the role of the institutional church in the realm of social commentary and criticism, as well as political activism. That there is a long standing concept within the church tradition relating to my curiosity is not terribly surprising after just an overview of the language that sociology theory has applied to religious bodies. The role of the church in relation to society is divided into two basic categories of action- that of the â€Å"priest,† and that of the â€Å"prophet.† (Download a PDF file of a pamphlet eslpaining the terminolgoy of "Priest & Prophet.") The former describes the conserving, nurturing actions of the church towards broader social structures, the latter, criticism and the call to move away from corruption towards righteousness. When acting as prophet in the most extreme sense, the church is considered to be in a time of, what is called, status confessionis - acknowledging a state of social injustice so abhorrent that the church must actively interject its influence into even the secular sphere and demand repentance and reform. Nazism and apartheid in South Africa are the two most often cited examples of church bodies acting in status confessionis (Schuurman 100). What intrigues me about this idea is the reserve with which it is invoked, judging by the tone of the passage where the concept is addressed in the book Vocation by Douglas Shuurman. Considering the broader historical-theological context of the issue, including Brunner's injunction against â€Å"‘the disastrous dogma that various ‘orders' are not subj... ...r place in the kingdom of God. On the other hand, as long as the hungry are being fed and the despised loved, God's hand is moving in the world. So I come full circle to find that we must faithfully remain amidst the brokenness and corruption, fix what we can, and be prepared to let God act as God will, as I, and each of us, pursue our own vocations and encourage others to do the same. As theologian Walter Brueggeman has written, â€Å"What God does first and best and most is to trust his people with their moment in history. He trusts them to do what must be done for the sake of the whole community.† So be it. Amen. Works Cited Buechler, Steven M., & F. Kurt Cylke, Jr. Social Movements: Perspectives and Issues . Toronto: Mayfield Publishing Company, 1997. Schuurman, Douglas J. Vocation . Grand Rapids, MI: William B. Eerdmans Publishing Company, 2004.

Interpretation and delivery of language Essay

I am writing to congratulate you upon being chosen to play the part of Richard in our forthcoming production of Richard III. This letter is a guide for you for how I would like the part of Richard to be acted. This shall be primarily based upon two key scenes in the play, which are Act 1 Scene I (opening scene) and Act 5 Scene VII (eve of battle scene). This guide covers 3 main aspects of playing the part of Richard. These are: Your interaction with other characters, your interpretation and delivery of speech within the play and your physical representation of Richard. The reason why these two scenes have been concentrated on is because they occur at key moments within the play and at opposite ends as well. Not only do they appear at opposite ends of the play but they also occur when Richards’s confidence is at opposite ends of the emotional spectrum. This enables us to see Richard from multiple perspectives and it shows us his multi-faceted mental and emotional states. As I am sure you are aware, Richard is portrayed as an Evil and conscience free king as well as being physically deformed. Although elements of this are based upon the truth, it is appreciated that Shakespeare made many of these descriptions up. Due to limited other historical reference this is how Richard is portrayed nowadays. Shakespeare’s reasons for, perhaps, making up these facts are to please the Queen at his time, who was Queen Elizabeth I. This would please her because it was her grandfather, Henry Tudor (later Henry VII (Richmond in the play)), who became King after Richard III was killed in battle. Obviously this made Richmond and Richard enemies, so portraying Richard as both evil and deformed would put Queen Elizabeth and her ancestry in better light. Richards’s evil is very evident from his very first speech (a soliloquy) in the first scene of Act 1. This solo speech to the audience sets the tone for the nature of Richards’s evil worlds and actions throughout the rest of the play. This supreme malignity is evident in the quote’†¦ that I will shortly send thy soul to heaven,’ when referring to his Brother Clarence who he has sworn to save from imprisonment. This is remorseless in its extreme form considering that he has pledged to his brother to have him released form the Tower, which Clarence believes, but in truth he is going to have him killed. This means you must portray an immense feeling of evil and remorselessness to the audience. This could be done by snarling and almost spitting when speaking of what you plan to have done as well as making angular and jerky motions rather than smooth rounded ones. However Richards’s evil is often matched by his intelligence and an example of this is in the quote ‘To set my brother Clarence and the king in deadly hate, the one against the other’. This shows how he is manipulative and again you must get the audience to believe this about you as well as making them in awe of your intelligence and scheming. It is obvious that Richard is aware of his intelligence, so portray this to the audience with a swagger and self confidence of a man who knows of his large capabilities. A lot of the reasons behind Richards’s hatred for all things jovial is due to his physical deformities and his hatred of his own appearance. He knows of his own deformities, obvious in the line ‘†¦Nor made to court and amorous looking glass’. He does however use this to focus himself on his intentions. An example of this is apparent in the line ‘†¦And therefore, since I cannot prove a lover†¦i am determined to prove a villain.’ These abnormalities should, at first, appear to displease you and annoy you; however within in an instant this should be changed to relief when he realises that his peculiarity can work in his advantage making him focused and more determined to achieve his goals. To make these deformities appear powerfully they must be exaggerated to let the audience know, although his abnormalities are making him more focussed, that they are still a physical weakness and therefore a hindrance. This can be achieved by appearing dependant on a cane that you shall be carrying. This is to give the impression that physically you are dependant upon other people or objects. This will also provide opportunities for people to attack you and taunt your disabilities, such as the cane could be kicked from beneath you and you could use it to regain your feet, again showing physical dependency. The focus that has stemmed from these disabilities must be showed prominently also. Richards focus is clear in the quote’ For then I’ll marry Warwick’s youngest daughter.’ This shows us what lengths he is willing to go to get and then keep the crown in his family after his death. His efficiency and preparation must be extravagant to give the audience reason to believe Richards apparent relief that his deformities can focus him on success. This means also that, regardless of the situation, you appear in control and assured, particularly in the earlier scenes of the play. From this scene where Richard is efficient, assured and organised, we move onto the other key scene. This is the eve of battle scene where both Richard and, his enemy, Richmond are preparing themselves and their army for battle. The scene starts with a quote from Richard saying ‘Why, out battalia trebles that account; besides the Kings name is a Tower of strength’. I for one believe that this act of confidence is one where the speaker, in this case Richard’ has very little faith in his comment so I would appreciate you saying this line with a distinct lack of conviction in your own remark. It seems to me also that with this comment he is not only trying to convince those listening of his army’s strength, but he is also convincing himself. His apparent lack of confidence is than compounded by the appearance of the ghosts. There are many quotes from the ghosts to Richard. A typical example of this would be ‘And fall thy edgeless sword; despair and die!’ which was said by the ghost of Clarence. These quotes must appear to affect you now as perhaps they wouldn’t have done in the earlier scenes. These effects include paranoia and further dents to your confidence which can be acted by adjusting your posture and body language. Then when he awakes from this dream he is convinced he has awaken from battle. Evidence of this is in the line ‘Give me another Horse! Bind up my wounds’ and following this he begins to question his conscience for the first time which is present in the quote ‘O coward conscience, how dost thou afflict me’. This shows us that he is no longer invulnerable and that the atrocities he has committed are beginning to take effect on him.

Net Present Value

Critics to DCF methods Ducht an UK companies * However, it is found inappropriate to use DCF methods for investments that have got strategic implications. * There are various reasons for the use of open approach. Since the outcomes of these projects are highly unforeseen, according one interviewee, the application of quantitative tools is not plausible. Therefore, companies tend to apply the rule of thumb methods rather than standardized quantitative models. The justification for not applying quantitative models is some times attributed to the nature of a project. Capital inv appraisal of new technologies: Problems, misconceptions and research directions Specifically, it has been alleged that the traditional appraisal methods of payback, discounted net present value (NPV) and internal rate of return (IRR) undervalues the long-term benefits; that traditional financial appraisals assume a far too static view of future industrial activity, under-rating the effects and pace of technological change; that there are many benefits from investments in new technology which are difficult to quantify and are often ignored in the appraisal process; and lastly, it is claimed that the systems of management control often employed by large organizations compound the bias against those investments which, although expensive, reap rewards vital for lon g-term viability. The first issue is a criticism of financial technique; the next two are criticisms of the way in which business operations are modelled; and the last is an issue of organizationalc ontrol and behavior. * We show that the criticisms directeda traditional appraisal methods may to some extent be based on misconceptions of the financial models and the ways in which they are best used * A similar objection is raised to the use of NPV and IRR. The claim is that discounting future cash benefits under-emphasizes the future benefits of new technology. This problem may be exacerbated by the application of risk premia to the discount rate. New echnology is assumed to be riskier than that which has been well established, Why DCF are bad for business and why business schools should stop using it * The assumptions related to DCF are increasingly becoming so disconnected from business reality that its continued use should come with the following warning, ‘This financial man agement technique is hazardous to your business. ’ * DCF as a capital investment appraisal tool suffers from a number of major limitations. These limitations include its narrow perspective, exclusion of non-financial benefits, overemphasis on the short-term, faulty assumptions about the status quo, inconsistent treatment of inflation, and promotion of dysfunctional/cheating behaviour. Previous authors, including Hastie (1974); Ramasesh and Jayakumar (1993); and Adler (2000) have enumerated and discussed the various sins of DCF. * The objections against the use of DCF for capital investment appraisal have often been objected to themselves. Kaplan (1986), for example, feels that the supposed limitations of DCF are in truth a limitation of the user and not of the technique. For example, the selection of a static discount rate is a failure of the user and not of the technique itself. Likewise, the inconsistent treatment of inflation, the overemphasis on the short-term, faulty assumptions about the status quo alternative, the adoption of a narrow organisational perspective, and manipulative and cheating behaviour are again all mistakes of the user. Even the difficulty of including non-financial benefits is seen as a lack of the financial analyst’s imagination rather than an inherent shortcoming of the technique. To help overcome the problems of DCF for capital investment decision-making, proponents of real options theory have argued for the tandem use of the Black and Scholes’ (1973) model and DCF. – The problem with DCF, and which cannot be overcome by its real options complement, occurs when data is not accessible or quantifiable. Not only do these occasions happen quite frequently, but also they become increasingly common as the decision moves from the operationally mundane to the strategically critical. The missapplication of capital investment appraisal techniques * Surveys of capital budgeting practices in the UK and USA reveal a trend towards the increased use of more sophisticated investment appraisals requiring the application of discounted cash flow (DCF) techniques. Several writers, however, have claimed that companies are underinvesting because they misapply ormisinterpret DCF techniques. * the only justification we can think of for using the accounting rate of return method is because top management believe that reported profits have an impact on how financial markets evaluate a company. This is further reinforced in many companies by linking management rewards to short-term financial accounting measures. Thus a project’s impact on the financial accounting measures used by financial markets would appear to be a factor that is taken into account within the decision-making process. Dimson and Marsh (1994) have expressed concern that many UK companies may be using exces sively high discount rates to appraise investments and, as a result, these companies are in danger of underinvesting. In the USA it has also been alleged that firms use discount rates to evaluate investment projects that are higher than their estimated cost of capital (Porter, 1992). Conclusions: Ducht an UK companies * All the UK case study companies apply combined methods of investment appraisal and most of them combine the DCF techniques with the value based management methods, such as SVA and EVA. The combination among the Netherlands companies, however, is mostly with the accounting based measures. Project decision-making in most of the case study companies is found decentralized, which provides the benefits of teamwork in project management. * In terms of appraisal model selection, however, the result is heterogeneous. Most companies prefer to apply combined methods of appraisal. Uniform methods of evaluation are no applied across all stages of a project, which will make diffi cult the comparison of project values at different stages. Although research in capital budgeting suggests the use of quantitative models for R&D and ICT projects, the application is not found in practice. In contrary, firms are relying on qualitative and non-standard approaches. This does not have rigorous theoretical basis, and hence, the decision-making process may not get an acceptable yardstick for its rationality. Capital inv appraisal of new technologies: Problems, misconceptions and research directions * Payback methods are inadequate appraisal techniques and should never be used alone. NPV and IRR are appropriate ways of valuing future cash-flows. Any bias in their application will be due to a systematic use of too high a discount rate, but this can be avoided by correct analysis. Assumptionsa bout the futurec an lead to bias if an over-optimisticp ictureo f the no-investment position is taken, but again this is an avoidable pitfall. As for the benefits ignored, many of these can be quantifieda nd broughtf ormallyi nto the analysis. W hereb enefitsc annot be quantifiedt, hey shouldn everthelessb e stateds o that they can be givenp roperc onsiderationw hena finalj udgement is made. The bias due to the use of short-term financial criteria can be removed by the use of measures reflecting the longer-term benefits of present investments. In principle, then, the biases of capital-investment appraisals are avoidable, but one difficulty remains. New technology invariably leads to greater complexity, and any unwillingness to face this complexity in the capital-investment process is likely to lead to bias against change. * NPV, IRR and PB undervalue long term benefits * Benefits from investing in technology very difficult to quantify and often are ignored in the appraisal process. DCF analysis places too little weight on the future due to the magnitude of the discount rate (too high). Reasons for a too high discount rate: 1. 2. to compensate non-profit projects 3. – To calculate the required rate of return we use t he CAPM – Managers? interests different from shareholders? ones so higher rate or return determined. Then, again, the critic/problem is not of the appraisal method but of its application or understanding Theory-practice gap in .. : UK The survey results indicate that UK corporations have increasingly adopted prescribed textbook financial analysis. The stage has now been reached where only a small minority do not make use of discounted cash flows, formal risk analysis, ppropriate inflation adjustment and post-auditing. However, managers continue to employ simpler rules-of-thumb techniques. There has not, in general, been a replacement of one set of methods with another, but rather, a widening of the range of ways of analysing a financial decision. Why DCF are bad for business and why business schools should stop using it It has been said, ‘Life must be lived forward but can only be understood backwards. ’ There is no denying that DCF is wonderful at looking backwa rds and calculating, for example, the actual NPV a project has earned. Sometimes, generally when commonplace, operational decisions are involved, DCF can even work as a forward-looking tool. To work in this manner, however, requires the relevant cash flow data to be either present or, perhaps with a bit of work, discoverable. DCF does not work well when the decision at hand is strategic in nature. In these situations, the data is often neither present nor discoverable in time for an ex ante evaluation. Only after the decision is made does useful data likely become available. The condition described here is well captured in the lyrics of the Rolling Stones’ song ‘You Can’t Always Get What You Want’: You can’t always get what you want But if you try sometimes, well you might find You get what you need. When it comes to matters that really matter, DCF and real options theory fail to enlighten us. Instead, they sap managers’ energy by focusing their attention on Pareto’s trivial many at the expense of his vital few. In the end, managers end up missing the forest in their search for the non-existent trees. It is time that as educators, we rediscovered the vital few and culled out the trivial many topics that have crept into our course outlines. DCF should be one of the first topics we drop or at a minimum drastically prune back. It is not only a prime example of the trivial many, but it is a potential hazard to firms that use it for decisions that affect firm strategy. Do I hear any other offers? The missapplication of capital investment appraisal techniques The use of conservative cash flow forecasts, combined with the incorrect treatment of nflation and excessive discount rates observed in the survey suggests that many UK organizations may be rejecting profitable investments. Given these problems it could be argued that DCF procedures should be abandoned or give n little weight in long-term investment decisions. We strongly disagree. DCF procedures should not be ignored or relegated in importance merely because they might be used incorrectly. Instead, decisionmakers should recognize potential problems and be careful to ensure that the financial appraisal is performed correctly. CRITICS TO PAYBACK PERIOD Capital inv appraisal of new technologies: Problems, misconceptions and research directions The objection to payback methods is that they ignore all cash flows after the desired payback period, which may be as short as 2 or 3 years. Thus they take no account of the long-term advantages that many large investments in new process technology bring, so the use of payback criteria is worthy of comment. 5 Payback can be insensitive to considerable variation among projects (in terms of their cash flows). 6 Payback methods are simple rules of thumb. Their attraction is their simplicity, and robustness for making judgements on possibly optimistic costings and uneasily quantified business risks. However, they do ignore medium- and long-term cash flows, and it is perhaps surprising that they seem to be regarded as serious tools of financial analysis. Net present value Firms generally have many investment opportunities available.   Some of these investment opportunities are valuable and others are not. The essence of successful financial management is identifying which opportunities will increase shareholder wealth. There are three basic and related concepts that form the very foundation of modern day finance: present value, net present value (NPV) and opportunity cost. Present value gives the value of cash flows generated by an investment and NPV gives the effective net benefit from an investment after subtracting its costs. Opportunity cost represents the rate of return on investments of comparable risk. Application of these concepts enables us to value different kinds of assets, especially those which are not commonly traded in well-functioning markets. NPV of an asset or investment is the present value of its cash flows less the cost of acquiring the asset. Smart investors will only acquire assets that have positive NPVs and will attempt to maximize the NPV of their investments. The rate of return received from an investment is the profit divided by the cost of the investment. Positive NPV investments will have rates of return higher than the opportunity cost. This gives an alternate investment decision rule. Good investments are those that have rates of return higher than the opportunity cost. This opportunity cost can be inferred from the capital market and is based on its risk characteristics of the investment. To assess why Net Present Value leads to better investment decisions than other criteria, let us start with a review of the NPV approach to investment decision making and then present four other widely used measures. These are: the payback period, the book rate of return, the internal rate of return (IRR) and profitability index. The measures are inferior to the NPV and should not, with the qualified exception of the IRR, normally be relied upon to provide sound investment decisions. These measures are commonly used in practice. The NPV represents the value added to the business by the project or the investment. It represents the increase in the market value of the stockholders’ wealth. Thus, accepting a project with a positive NPV will make the stockholders better off by the amount of its NPV. The NPV is the theoretically correct method to use in most situations. Other measures are inferior because they often give decisions different from those given by following the NPV rule. They will not serve the best interests of the stockholders (Brealey, 2002). To calculate NPV we should firstly forecast the incremental cash flows generated by the project and determine the appropriate discount rate, which should be the opportunity cost of capital. Then calculate the sum of the present values (PV) of all the cash flows generated by the investment. NPV = PV of cash inflows – initial investment. To make decision on investment, we should accept projects with NPV greater than zero and for mutually exclusive projects, accept the project with the highest NPV, if the NPV is positive. The NPV represents the value added to the stockholders’ wealth by the project. The discount rate should reflect the opportunity cost of capital or what the stockholders can expect to earn on other investments of equivalent risk (Brealey, 2002). The NPV approach correctly accounts for the time value of money and adjusts for the project’s risk by using the opportunity cost of capital as the discount rate. Thus, it clearly measures the increase in market value or wealth created by the project. The NPV of a project is not affected by â€Å"packaging† it with another project. In other words, NPV(A+B) = NPV(A) + NPV(B). The NPV is the only measure that provides the theoretically correct measure of a project’s value (Ross, 2002). Payback Period. The payback period is simply the time taken by the project to return your initial investment. The measure is very popular and is widely used; it is also a flawed and unreliable measure. It is simple to calculate and easy to comprehend. However, payback period has very limited economic meaning because it ignores the time value of money and the cash flows after the payback period. It can be inconsistent and the ranking of projects may be changed by packaging with other projects. Discounted payback is a modified version of the payback measure and uses the discounted cash flows to compute payback. This is an improvement over the traditional payback in that the time value of money is recognized. A project, which has a measurable discounted payback, will have a positive NPV. However, the other disadvantages of payback still apply. It is also not simple anymore (Investment Criteria). Book Rate of Return (BRR). This is a rate of return measure based on accounting earnings and is defined as the ratio of book income to book assets. Accounting earnings are reported by firms to the stockholders and the book return measure fits in with the reported earnings and the accounting procedures used by firms. However, the measure suffers from the serious drawback that it does not measure the cash flows or economic profitability of the project. It does not consider the time value of money and gives too much weight to distant earnings. The measure depends on the choice of depreciation method and on other accounting conventions. BRR can give inconsistent ranking of projects and rankings may be altered by packaging. There is very little relationship between the book return and the IRR. (Brealey, 2002). Internal Rate of Return (IRR). IRR is defined as the discount rate at which the NPV equals zero. Used properly, the IRR will give the same result as the NPV for independent projects and for projects with normal cash flows. As long as the cost of capital is less than the IRR, the NPV for the project will be positive. IRR can rank projects incorrectly, and the rankings may be changed by the packaging of the projects. For mutually exclusive projects, IRR can give incorrect decisions and should not be used to rank projects. If one must use IRR for mutually exclusive projects, it should be done by calculating the IRR on the differences between their cash flows (Ross, 2002). Profitability Index. Occasionally, companies face resource constraint or capital rationing. The amount available for investment is limited so that all positive NPV projects cannot be accepted. In such cases, stockholder wealth is maximized by taking up projects with the highest NPV per dollar of initial investment. This approach is facilitated by the profitability index (PI) measure. Profitability index is defined as: NPV/Investment. The decision rule for profitability index is to accept all projects with a PI greater than zero. This rule is equivalent to the NPV rule. The modified rule applied in the case of capital rationing is to accept projects with the highest profitability index first, followed by the one with next highest, and so on till the investment dollars are exhausted. This rule will maximize the NPV and stockholder wealth. If the resource constraint is on some other resources, the profitability index needs to be modified to measure the NPV per unit of the resource that is rationed. The profitability index cannot cope with mutually exclusive projects or where one project is contingent on another (Brealey, 2002). Thus, comparing NVP with other criteria we can assert that NPV is superior to other criteria. First, it is the only measure, which considers the time value of money, properly adjusting for the opportunity cost of capital. Second, it gives consistent measures of the project’s value (i.e. not affected by packaging with other projects). Third, it clearly measures the value added to the stockholders’ wealth. The only exception to the superiority of NPV is when the firm is constrained by capital rationing. This implies that the firm cannot finance all positive NPV projects and should therefore choose projects that give the highest NPV for each dollar of investment. The profitability index that is defined as the ratio of NPV to the investment amount is used to achieve this selection. However, the other criteria for the evaluation of projects are found to be popular in practice. If using them, we should make sure we use them in the best possible way and understand the limitations of them. For example, we should always compare mutually exclusive projects on the basis of the difference between their cash flows, because that it is the cash flows that determine the value of a project. Inadequate forecast of the cash flows can be far more disastrous than using the wrong appraisal technique. Cash flow forecasts are difficult to make and can be expensive. It does not make sense to waste the forecasts by using an inferior method of evaluation. References: Brealey, Richard A. & Myers, Stewart C. (2002). Principles of Corporate Finance, 7th ed. Chapters 5 – 6. Irwin/McGraw-Hill Book Co. Investment Criteria, Chapter 9. Introduction to Finance. COMM 203 Homepage. College of Commerce, University of Saskatchewan, 2004 from http://www.commerce.usask.ca/faculty/loescher/Commerce203/CapitalBudgeting/Investment_Criteria.ppt Ross, S., Westerfield, R., Jordan, B. & Roberts, G. (2002). Fundamentals of Corporate Finance, 4th Edition. McGraw-Hill Ryerson Limited. Net Present Value Critics to DCF methods Ducht an UK companies * However, it is found inappropriate to use DCF methods for investments that have got strategic implications. * There are various reasons for the use of open approach. Since the outcomes of these projects are highly unforeseen, according one interviewee, the application of quantitative tools is not plausible. Therefore, companies tend to apply the rule of thumb methods rather than standardized quantitative models. The justification for not applying quantitative models is some times attributed to the nature of a project. Capital inv appraisal of new technologies: Problems, misconceptions and research directions Specifically, it has been alleged that the traditional appraisal methods of payback, discounted net present value (NPV) and internal rate of return (IRR) undervalues the long-term benefits; that traditional financial appraisals assume a far too static view of future industrial activity, under-rating the effects and pace of technological change; that there are many benefits from investments in new technology which are difficult to quantify and are often ignored in the appraisal process; and lastly, it is claimed that the systems of management control often employed by large organizations compound the bias against those investments which, although expensive, reap rewards vital for lon g-term viability. The first issue is a criticism of financial technique; the next two are criticisms of the way in which business operations are modelled; and the last is an issue of organizationalc ontrol and behavior. * We show that the criticisms directeda traditional appraisal methods may to some extent be based on misconceptions of the financial models and the ways in which they are best used * A similar objection is raised to the use of NPV and IRR. The claim is that discounting future cash benefits under-emphasizes the future benefits of new technology. This problem may be exacerbated by the application of risk premia to the discount rate. New echnology is assumed to be riskier than that which has been well established, Why DCF are bad for business and why business schools should stop using it * The assumptions related to DCF are increasingly becoming so disconnected from business reality that its continued use should come with the following warning, ‘This financial man agement technique is hazardous to your business. ’ * DCF as a capital investment appraisal tool suffers from a number of major limitations. These limitations include its narrow perspective, exclusion of non-financial benefits, overemphasis on the short-term, faulty assumptions about the status quo, inconsistent treatment of inflation, and promotion of dysfunctional/cheating behaviour. Previous authors, including Hastie (1974); Ramasesh and Jayakumar (1993); and Adler (2000) have enumerated and discussed the various sins of DCF. * The objections against the use of DCF for capital investment appraisal have often been objected to themselves. Kaplan (1986), for example, feels that the supposed limitations of DCF are in truth a limitation of the user and not of the technique. For example, the selection of a static discount rate is a failure of the user and not of the technique itself. Likewise, the inconsistent treatment of inflation, the overemphasis on the short-term, faulty assumptions about the status quo alternative, the adoption of a narrow organisational perspective, and manipulative and cheating behaviour are again all mistakes of the user. Even the difficulty of including non-financial benefits is seen as a lack of the financial analyst’s imagination rather than an inherent shortcoming of the technique. To help overcome the problems of DCF for capital investment decision-making, proponents of real options theory have argued for the tandem use of the Black and Scholes’ (1973) model and DCF. – The problem with DCF, and which cannot be overcome by its real options complement, occurs when data is not accessible or quantifiable. Not only do these occasions happen quite frequently, but also they become increasingly common as the decision moves from the operationally mundane to the strategically critical. The missapplication of capital investment appraisal techniques * Surveys of capital budgeting practices in the UK and USA reveal a trend towards the increased use of more sophisticated investment appraisals requiring the application of discounted cash flow (DCF) techniques. Several writers, however, have claimed that companies are underinvesting because they misapply ormisinterpret DCF techniques. * the only justification we can think of for using the accounting rate of return method is because top management believe that reported profits have an impact on how financial markets evaluate a company. This is further reinforced in many companies by linking management rewards to short-term financial accounting measures. Thus a project’s impact on the financial accounting measures used by financial markets would appear to be a factor that is taken into account within the decision-making process. Dimson and Marsh (1994) have expressed concern that many UK companies may be using exces sively high discount rates to appraise investments and, as a result, these companies are in danger of underinvesting. In the USA it has also been alleged that firms use discount rates to evaluate investment projects that are higher than their estimated cost of capital (Porter, 1992). Conclusions: Ducht an UK companies * All the UK case study companies apply combined methods of investment appraisal and most of them combine the DCF techniques with the value based management methods, such as SVA and EVA. The combination among the Netherlands companies, however, is mostly with the accounting based measures. Project decision-making in most of the case study companies is found decentralized, which provides the benefits of teamwork in project management. * In terms of appraisal model selection, however, the result is heterogeneous. Most companies prefer to apply combined methods of appraisal. Uniform methods of evaluation are no applied across all stages of a project, which will make diffi cult the comparison of project values at different stages. Although research in capital budgeting suggests the use of quantitative models for R&D and ICT projects, the application is not found in practice. In contrary, firms are relying on qualitative and non-standard approaches. This does not have rigorous theoretical basis, and hence, the decision-making process may not get an acceptable yardstick for its rationality. Capital inv appraisal of new technologies: Problems, misconceptions and research directions * Payback methods are inadequate appraisal techniques and should never be used alone. NPV and IRR are appropriate ways of valuing future cash-flows. Any bias in their application will be due to a systematic use of too high a discount rate, but this can be avoided by correct analysis. Assumptionsa bout the futurec an lead to bias if an over-optimisticp ictureo f the no-investment position is taken, but again this is an avoidable pitfall. As for the benefits ignored, many of these can be quantifieda nd broughtf ormallyi nto the analysis. W hereb enefitsc annot be quantifiedt, hey shouldn everthelessb e stateds o that they can be givenp roperc onsiderationw hena finalj udgement is made. The bias due to the use of short-term financial criteria can be removed by the use of measures reflecting the longer-term benefits of present investments. In principle, then, the biases of capital-investment appraisals are avoidable, but one difficulty remains. New technology invariably leads to greater complexity, and any unwillingness to face this complexity in the capital-investment process is likely to lead to bias against change. * NPV, IRR and PB undervalue long term benefits * Benefits from investing in technology very difficult to quantify and often are ignored in the appraisal process. DCF analysis places too little weight on the future due to the magnitude of the discount rate (too high). Reasons for a too high discount rate: 1. 2. to compensate non-profit projects 3. – To calculate the required rate of return we use t he CAPM – Managers? interests different from shareholders? ones so higher rate or return determined. Then, again, the critic/problem is not of the appraisal method but of its application or understanding Theory-practice gap in .. : UK The survey results indicate that UK corporations have increasingly adopted prescribed textbook financial analysis. The stage has now been reached where only a small minority do not make use of discounted cash flows, formal risk analysis, ppropriate inflation adjustment and post-auditing. However, managers continue to employ simpler rules-of-thumb techniques. There has not, in general, been a replacement of one set of methods with another, but rather, a widening of the range of ways of analysing a financial decision. Why DCF are bad for business and why business schools should stop using it It has been said, ‘Life must be lived forward but can only be understood backwards. ’ There is no denying that DCF is wonderful at looking backwa rds and calculating, for example, the actual NPV a project has earned. Sometimes, generally when commonplace, operational decisions are involved, DCF can even work as a forward-looking tool. To work in this manner, however, requires the relevant cash flow data to be either present or, perhaps with a bit of work, discoverable. DCF does not work well when the decision at hand is strategic in nature. In these situations, the data is often neither present nor discoverable in time for an ex ante evaluation. Only after the decision is made does useful data likely become available. The condition described here is well captured in the lyrics of the Rolling Stones’ song ‘You Can’t Always Get What You Want’: You can’t always get what you want But if you try sometimes, well you might find You get what you need. When it comes to matters that really matter, DCF and real options theory fail to enlighten us. Instead, they sap managers’ energy by focusing their attention on Pareto’s trivial many at the expense of his vital few. In the end, managers end up missing the forest in their search for the non-existent trees. It is time that as educators, we rediscovered the vital few and culled out the trivial many topics that have crept into our course outlines. DCF should be one of the first topics we drop or at a minimum drastically prune back. It is not only a prime example of the trivial many, but it is a potential hazard to firms that use it for decisions that affect firm strategy. Do I hear any other offers? The missapplication of capital investment appraisal techniques The use of conservative cash flow forecasts, combined with the incorrect treatment of nflation and excessive discount rates observed in the survey suggests that many UK organizations may be rejecting profitable investments. Given these problems it could be argued that DCF procedures should be abandoned or give n little weight in long-term investment decisions. We strongly disagree. DCF procedures should not be ignored or relegated in importance merely because they might be used incorrectly. Instead, decisionmakers should recognize potential problems and be careful to ensure that the financial appraisal is performed correctly. CRITICS TO PAYBACK PERIOD Capital inv appraisal of new technologies: Problems, misconceptions and research directions The objection to payback methods is that they ignore all cash flows after the desired payback period, which may be as short as 2 or 3 years. Thus they take no account of the long-term advantages that many large investments in new process technology bring, so the use of payback criteria is worthy of comment. 5 Payback can be insensitive to considerable variation among projects (in terms of their cash flows). 6 Payback methods are simple rules of thumb. Their attraction is their simplicity, and robustness for making judgements on possibly optimistic costings and uneasily quantified business risks. However, they do ignore medium- and long-term cash flows, and it is perhaps surprising that they seem to be regarded as serious tools of financial analysis.