what NPV and IRR are really used for - not what the textbooks say!

Every textbook on finance will tell you that capital budgeting techniques (NPV, IRR and all the rest of it) are used by companies to make investment decisions. My experience as a financial analyst and consultant tells me the truth is quite different..and quite a bit more subtle. In practice this is what usually happens - a decision is made by management, generally on considerations like strategy, positioning, market opportunities -I would go so far as to assert that the more important a decision, the less it is driven by financial analysis. Utterly trivial decisions (that is, from a strategic point of view, trivial), may get decided by the 'numbers' alone -they may get done if the financial analysis shows it is a slam-dunk and only an idiot would not make the investment, whatever it is.. when the numbers overwhelmingly argue, cry out even, for an investment decision, it may get made, but not otherwise.. (an anecdote here - a lifetime ago, when I was a financial analyst, it was my doubtful privilege to take before finance committee a proposal to buy a slide-maker - this was in the days before ppts, of course. I thought I had done a marvelous analysis, with NPV and IRR all worked out, and the finance committee rejected my modest request for $200K, after giving me hell for about an hour. Next up was a proposal to build a data center for $15 M.. passed without discussion! Why? as my boss, the treasurer, was kind enough to explain to me,it is not because finance committee didn't like my face, it was just that the company is not in the business of making slides, so the slide machine had to be a slam-dunk, justified overwhelmingly by the numbers alone. The data centers, on the other hand, were the life-blood of the company..) So, if NPV and IRR are not used to make decisions, not important ones anyway, what good are they. Here is an insight you will never find in any of the textbooks - they are used to structure the project so that the decision to invest gets justified! That is, not to decide whether to do the project, but to decide how to do the project. It is a guide to action, a playbook. After all, it is used mainly by middle-managers, not by CxOs. Remember, the role of middle management is not to make strategic decisions - it is their role to implement strategic decisions! So is capital budgeting useless? Not at all - but not the way the finance textbooks think But them what would you expect? Finance textbooks are written by people who have never seen the real world!