This paper will evaluate the Discounted-Cash-Flow-Method (DCF) as a certain value based performance measurement system (VBPMS). Therefore criteria of evaluating performance measurement systems (PMS) in generally will be created (Chapter 2). This strategy will guarantee the fundamental comparability of the derived features of the DCF with these of other PMS (including non-VBPMS, too). Chapter 3 will emphasize a fundamental feature of VBPMS, the shareholder orientation. After a detailed investigation of the DCF in chapter 4, its criteria will be evaluated in chapter 5. Finally a quintessence closes this paper (chapter 6).
2 Criteria for evaluating performance measurement systems
In this chapter criteria of value based performance measurement systems will be developed. Therefore the sense of performance in connection with enterprises will be explained, at first. Finally, the term “performance measurement system” (PMS) will be defined in order to point out there criteria.
2.1 The performance of an enterprise
Performance of an enterprise stands for its achievement, its power or its output 1 . To describe this term exactly, it is important to get an impression of the objectives of an enterprise (see Figure 7.1).The objectives of an enterprise are derived from its mission 2 . The mission of a company stresses its basic function in society. Qualitative aims, called goals, are derived from the mission. If they are expressed in a way that can be measured, they are called objectives. Shareholder wealth maximisation is the traditional objective of firms 3 . In general, “any group or individual who can affect or is affected by the achievement of the organization’s objectives” 4 (Stakeholder) can influence its mission and therefore its objectives. And some of them do so, as one can realise for example by investigating the success of the Balanced Score Card 5 as a performance measurement instrument that emphasises the objectives of several stakeholders 6 . Obviously, not every Stakeholder can by considered. Only the interests of a few key-stakeholders will be regarded by the target system of a firm. Shareholders are one of the considered key-stakeholders because of their influence on the process of creating the mission (consider the rights of co determination of the general business meeting and the supervisory board 7 at share companies; the influence of the shareholders on partnerships is trivial).
Inhaltsverzeichnis (Table of Contents)
- INTRODUCTION
- CRITERIA FOR EVALUATING PERFORMANCE MEASUREMENT SYSTEMS
- THE PERFORMANCE OF AN ENTERPRISE
- PERFORMANCE MEASUREMENT SYSTEMS
- VALUE BASED PERFORMANCE MEASUREMENT SYSTEMS (VBPMS)
- THE DISCOUNTED CASH FLOW METHOD - DCF.
- THE PRINCIPLE OF THE DCF.
- HOW CAN THE SHAREHOLDER VALUE BE MEASURED WITH THE DCF.
- WACC
- OPERATING CF
- RESIDUAL VALUE
- PLANNING...
- CAPITAL INVESTMENT PLANNING
- DIVISIONAL INVESTMENT MANAGEMENT PROCESS....
- GENERAL PLANNING PROCESS
- SUMMARY PLANNING
- NAVIGATING AND MONITORING
- EVALUATION OF THE DISCOUNTED CASH FLOW METHOD......
- THE STAKEHOLDERS THAT ARE CONSIDERED BY VBPMS.
- COGNITIVE MODEL......
- STRATEGIC BIAS
- TARGET CONFORMITY.
- FEED-BACK FUNCTION
- FEED-FOREWORD-FUNCTION
- RELEVANCE FOR PRAXIS....
- QUINTESSENCE
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to critically evaluate the Discounted Cash Flow Method (DCF) as a value-based performance measurement system (VBPMS). To achieve this, the paper first establishes criteria for evaluating performance measurement systems (PMS) in general (Chapter 2), ensuring that the DCF can be compared with other PMS. Chapter 3 highlights the shareholder orientation characteristic of VBPMS. After a detailed examination of the DCF in Chapter 4, its criteria are evaluated in Chapter 5. The paper concludes with a summary (Chapter 6).
- Criteria for evaluating performance measurement systems
- Shareholder orientation in value-based performance measurement systems
- The Discounted Cash Flow method: principles, application, and limitations
- Evaluation of the DCF against established criteria
- Relevance and applicability of the DCF in practice
Zusammenfassung der Kapitel (Chapter Summaries)
Chapter 2 outlines the criteria for evaluating performance measurement systems (PMS). It begins by defining the concept of enterprise performance, emphasizing the importance of achieving organizational objectives. The chapter then introduces PMS, explaining its role in planning, navigating, and monitoring performance. Key criteria for evaluating PMS are presented, including cognitive model, stakeholder groups, strategic bias, target conformity, feedback function, feed-forward function, and relevance for practice.
Chapter 3 explores the concept of value-based performance measurement systems (VBPMS), emphasizing their shareholder orientation. It explains how shareholder wealth maximization is a central objective of firms, acknowledging that other key stakeholders may also have interests.
Chapter 4 delves into the Discounted Cash Flow (DCF) method, a widely used value-based performance measurement system. The chapter discusses the principles behind the DCF, exploring its application in calculating shareholder value. It also outlines the steps involved in planning, navigating, and monitoring with the DCF.
Chapter 5 evaluates the DCF method using the criteria established in Chapter 2. It examines the stakeholders considered by the DCF, its cognitive model, strategic bias, target conformity, feedback and feed-forward functions, and its relevance for practice.
Schlüsselwörter (Keywords)
The paper focuses on value-based performance measurement, the Discounted Cash Flow method, shareholder value, performance measurement systems, criteria for evaluating performance measurement, strategic bias, target conformity, cognitive model, feedback function, feed-forward function, and relevance for practice.
- Citation du texte
- Jens Jannasch (Auteur), 2003, Critical Evaluation of the Discounted Cash Flow-Method as a Value Based Performance Measurement Concept, Munich, GRIN Verlag, https://www.grin.com/document/22886
