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1. Introduction
Sound financial management and capital investment decision making are critical to survival and long-term success for firms. The global financial crisis has only affirmed this truth. This paper contributes to understanding the role of accounting in business decisions by demonstrating the need for more sophistication in firms' analysis of investment choices, and provides sound advice for practitioners, in order that incorrect decision making and underinvestment can be minimized. This research investigated current capital budgeting practices of large firms in Canada, which appears to have received relatively less attention in the literature than other countries in recent times regarding use of DCF.
DCF has become the dominant evaluation method in Canada ([30] Jog and Srivastava, 1995; [34] Payne et al. , 1999), the UK ([2] Arnold and Hatzopoulos, 2000) and the USA ([22] Farragher et al. , 1999; [26] Graham and Harvey, 2001; [45] Ryan and Ryan, 2002). There has been a resurgence of interest in this field due to concern with the technical aspects of DCF ([11] Bosch et al. , 2007; [17] Cary, 2008; [32] Magni, 2009) and inquiry into qualitative techniques ([40] Pike, 2005). However, it is not always applied correctly and there are pitfalls in its casual use ([21] Drury and Tayles, 1997). The DCF method is the preeminent decision tool available and managers should learn to use it well ([4] Bierman and Smidt, 1993). Misuse is perhaps not surprising given the complexity of current academic debate about what constitutes the correct technique (e.g. [11] Bosch et al. , 2007; [17] Cary, 2008; [32] Magni, 2009). As this paper and previous research show, advanced techniques may be well accepted and understood in the scholarly literature but are not universally observed in management practice.
This paper first reviews the concept of DCF, compares the popularity and prevalence of NPV versus IRR, synthesizes previous research to illustrate trends, details the "nitty gritty" of DCF from the practitioner literature and previous research, shows common pitfalls, and then explains how each of the above manifest in a current study of large firms in Canada. The paper partially fills a gap in recent empirical research in that country on capital budgeting practices and DCF techniques, in this decade.
2. Capital budgeting decision making
Capital budgeting...