Discounted future. The conception(s) of a valuation and management device

This contribution focuses on a widespread managerial technique which consists in assessing projects according to the present value of the future revenues that they as expected to generate. Discounted cash flow (DCF) is one of the first tools that management students and practitioners are provided with when faced with the problem of calculating value and making decisions. The evidence with which it appears today lies in sharp contrast with its surprisingly recent and controversial history. It is into this history that we propose to look here, by shedding light on three key moments in the constitution of DCF as a valuation and management device. We will analyze the issues that DCF raises in each of these three moments, the controversies that it triggers, and the changes that it induces in practice. Our objective is to describe the sociotechnical networks that make this formula hold and act, and to characterize the managerial action that it sketches and equips. The basic principle of DCF is simple: the value of something - of anything, actually - is equal to the future cash flows that this thing will produce in the future, with these cash flows being discounted by a certain factor due to their distance in time and, if applicable, to the uncertainty of their occurrence and size. There are several assumptions in such a theory of valuation. The valuating gaze is oriented towards the future, instead of being concerned with the present characteristics of the thing being valued or with the past activities that have brought this thing into existence. It is the future that counts, then, but the future in question is a discounted one, for there is a cost of time: in other words, money is worth more now than later. Indeed, DCF claims, one who has a euro today can save this euro in a bank account at a certain rate of interest, and hence receive more than one euro in, say, a year or two. This alternative scenario is to be taken into account in the valuation of any project: investing implies tying up capital which could have otherwise been readily remunerated through a rate of interest. At the roots of DCF one finds the "discounts", which, as early as the 14th century, Italian merchants provided to customers who paid their bills before their due date (Faulhaber and Baumol 1988), and the "present values" of life annuities which were developed by actuaries in the 17th century (Rubinstein 2003). However, it was not until the 19th century that these ideas were adapted for the valuation of non-financial assets. The use of DCF analysis in that period is documented in the records of colliery viewers in the Tyneside coal industry (Brackenborough, Mclean, and Oldroyd 2001), as well as in the computations of German foresters, like Martin Faustmann, and of American railroad engineers, like Arthur Wellington (Faulhaber and Baumol 1988). Such attempts to value non-financial assets with DCF remained sporadic, though. Moreover, they were confined to specific sectors (i.e., forests, coal mines, and railroads), and failed to reach consensus. In the beginning of the 20th century, the American economist Irving Fisher - referring, in particular, to the German foresters' calculations - theorized DCF and extended its application to the valuation of any type of capital. It took another 50 years for his ideas to be embraced in firms' capital budgeting practices. Entrenched in management education and consultancy (Dean 1951), promoted by government in the search for higher investment and growth (Miller 1991; Pezet 1997), DCF has enjoyed a dazzling career since the second half of the 20th century, ending up as one the most widespread methods for the valuation of investment projects. We will turn back to three pivotal moments in the conception of DCF: its original applications for the valuation of forests through the work of Martin Faustmann in 1849; its first formalization by Irving Fisher in 1906; and its rise in firms' investment practices following the publication of Joel Dean's textbook on capital budgeting in 1951. Our objective is neither to provide a comprehensive history of DCF - important developments such as the work of US railroad engineers in the late 19th century (Dulman 1989) will not be dealt with here -, nor to rigorously identify its birth, but rather to outline its fundamental conceptions of value and management - conceptions which it has both embedded and helped to bring into existence.