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Methods of Evaluation
As regards the use of evaluation methods, most Indian companies, use payback criterion.
In addition to payback and/or other methods, some companies also use intermal rate of
return (IRR) and net present (NPV) methods. A few companies use accounting rate
of return (ARR) method. IRR is the second most popular technique in ndia.
The major reason for DCF techniques not being as popular as payback is the lack of
familiarity with DCF on the part of executives. Other factors are lack of technical
people and sometimes unwillingness of top management to use the DCF techniques.
One large manufacturing and marketing organisation, for example, thinks that conditions
of its business are such that the DCF techniques are not needed. By business conditions
the company perhaps means its marketing nature, and its products being in seller's
markets. Another company feels that replacement projects are very frequent in the
company, and therefore, it is not necessary to use DCF techniques for such projects.
The practice of companies in India regarding the use of evaluation criteria is similar
to that in USA. A study by Schal, Sundem and Geiljsbeak (1978) showed that whereas
86 per cent of the firms used either the internal rate of return or net present value
models, only 16 per cent used such discounting techniques without using the payback
period or average rate of return methods. The tendency of US firms to use naive
techniques as supplementary tools has also been reported in other studies. However,
fims in USA have come to depend increasingly on the DCF techniques, particularly
IRR. According to Rockley's study (1973X the British companies use both DCF