Models of resource allocation

de Julie Huffman Hertenstein

The allocation of resources whether to fixed investments such as buildings, land or equipment or to non-fixed investments such as research, new product development, or special advertising campaigns designed to penetrate new geographic markets requires important, complex and sometimes difficult management decisions. These decisions are often critical due to the magnitude of the resources committed, the lengthy time period over which they are committed, the limited supply of the resources, and the strategic implications of decisions. The discounted cash flow (DCF) model considers risk, cash flows and the time value of money; it is presented in finance and accounting texts as the preferred method of selecting projects for the allocation of resources. This paper identifies important problems which limit the use of DCF in practice.