Summary by Chris Hourigan
Master of Accountancy Program
University of South Florida, Summer 2002
This article introduces a new approach for evaluating investment opportunities. The author points out problems associated with the old way of emphasizing Earnings Per Share (EPS). EPS is very narrowly focused on the way it evaluates how a company is operating and therefore, is open to misleading management to accept investment opportunities, when given other factors, they would not.
The Multiple Attribute Decision Model (MADM)
The MADM approach is designed to include 3 critical factors:
nonfinancial quantitative, and
By objectively setting these factors all projects can be evaluated equally and therefore, make it easy for management to choose between alternatives.
The Multiple Attribute Decision Model essentially sets up a decision table that is predetermined for their individual values as not to bias any one project.
There are five factors encompassing the financial quantitative critical criteria:
net present value,
level of investment per time period,
level of savings per time period, and
There are four factors encompassing the nonfinancial quantitative critical criteria:
schedule attainment, and
Finally, there are five factors encompassing the qualitative critical criteria:
All of the weights of these factors must sum to 100, and all are original to each company. For example, one company might not have any technology costs.
When implemented MADM should be able to be used across a wide spectrum of investment opportunities. It also should be able to intermingle opportunities together on the same chart to be able to fine tune opportunities and to see two opportunities together. But to be able to accomplish this the chart must be set up correctly and independently of all opportunities.
The author is on track by introducing a wide variety of criteria into the decision making process, but the downfall might be the practicality of MADM. The process is very detailed and complex, and therefore, it would be very hard to implement by most companies. Furthermore, a team with individual specialties in such areas would also be needed. MADM might work rather well in achieving its goal of pointing management in the right direction of which investment opportunity to choose in order to move the company towards its goal, but the difficulty lies in setting up MADM to correctly do so. (A note on the MADM approach appears in the Investment management summary of summaries).
Bensaou, M. and M. Earl. 1998. The right mind-set for managing information technology. Harvard Business Review (September-October): 119-128. (Summary).
Berliner, C., and J. A. Brimson, eds. 1988. Cost Management for Today's Advanced Manufacturing: The CAM-I Conceptual Design. Boston: Harvard Business School Press. (Summary Chapters 1-3).
Cherry, K. 1993. Why aren't more investments profitable? Journal of Cost Management (Summer): 28-37. (Summary).
Engwall, R. L. 1988. Cost/benefit analysis. Journal of Cost Management (Fall): 64-70. (Summary).
Engwall, R. L. 1989. Investment justification issues. Journal of Cost Management (Spring): 50-53. (Summary).
Gold, B. 1976. The shaky foundations of capital budgeting. California Management Review (Winter): 51-60. (Summary).
Hayes, R. H. and W. J. Abernathy. 2007. Managing our way to economic decline. Harvard Business Review (July-August): 138-149. (This is a reprint of their 1980 article with a retrospect by Hayes on page 141). (Summary).
Heard, E. 1996. Investment justification: The cost justification charade. Journal of Cost Management (Summer): 60-65. (Summary).
Howell, R. A. and S. R. Soucy. 1987. Capital investment in the new manufacturing environment. Management Accounting (November): 26-32. (Summary).
Kite, D. 1995. Capital budgeting: Integrating environmental impact. Journal of Cost Management (Summer): 11-14. (Summary).
Lyons, B., A. Gumbus and D. E. Bellhouse. 2003. Aligning capital investment decisions with the balanced scorecard. Journal of Cost Management (March/April): 34-38. (Summary).
Martin, J. R. Not dated. Investment management. Management And Accounting Web. https://maaw.info/InvestmentManageSum.htm
Martin, J. R. Not dated. Moving baseline examples from Sinason. Management And Accounting Web. https://maaw.info/MovingBaselineExamples.htm
Martin, J. R. 1994. A controversial issues approach to enhance management accounting education. Journal of Accounting Education (Winter): 59-75. (Summary).
Primrose, P. L. 1992. Is anything really wrong with cost management? Journal of Cost Management (Spring): 48-57. (Summary).
Sinason, D. H. 1991. A dynamic model for present value capital expenditure analysis. Journal of Cost Management (Spring): 40-45. (Summary).