It’s 2015, why is everyone still using NPV?
Watching Back To The Future again recently, I was horrified to realize that, at the end of the movie, the professor and Marty use their time machine to travel from 1985 to…wait for it…2015. They traveled 30 years into the future, and I’ve aged 30 years since last seeing the movie.
Robert Zemeckis’s vision for The Future doesn’t exactly match the real 2015. There are no flying cars or hoverboards. But he did get some things right: we do have wall-sized televisions, tablet computers, and video conferencing. All in all, things have changed a lot since 1985.
But one thing hasn’t changed: firms are still using net present value (NPV) as a metric to evaluate the potential of R&D initiatives. NPV was first mentioned in the literature in 1907, according to historians. It’s survived 108 years because it does have its uses—as an indicator of investment potential and a summary of an initiative’s cash flow impact.
But for R&D evaluation, NPV is sometimes misunderstood and frequently misused. Let’s look at the good, the bad, and the ugly: