Breakthroughs And Development Of Discounted Cash Flow Method

There are two deficits existing in the assumptions of traditional discounted cash flow method, that is neglecting the irreversible of project and option of deferment, besides managers may manipulate the project evaluation for their own interest purpose. The uncertain operating environment and incentive conflicts require that the company has to solve these problems in order to make adequate investment decisions.Real option analysis and EVA method solve these problems respectively. On one hand, ROA can ensure that the option value inherent in the investment opportunities can be properly recognized, in this way it can solve the problem of undermining uncertainty of the traditional DCF method. On the other hand, the EVA method eliminate the possibility of manipulating project evaluation through combining capital budgeting, performance evaluation and manager motivation plan.This paper carefully analyzes the two deficits existing in the traditional DCF method, and through the introduction and analysis of ROA and EVA method, we present the advantages of these two methods over the DCF method. Furthermore, by comparison of these two methods, we present the tactics to select and apply the most appropriate project evaluation method. We hope that our research can help the company make perfect investment decision.