Chapter

Capital Budgeting

H. Kent Baker, J. Clay Singleton and E. Theodore Veit

in Survey Research in Corporate Finance

Published in print December 2010 | ISBN: 9780195340372
Published online May 2011 | e-ISBN: 9780199894215 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195340372.003.0003

Series: Financial Management Association Survey and Synthesis Series

Capital Budgeting

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This chapter reviews the findings of published surveys of corporate executives showing the project evaluation methods used in capital budgeting. The chapter compares the findings to the theoretically correct methods described and recommended in the academic literature. The goals are to identify past trends, ascertain current practices, and evaluate the existing gap between theory and practice. A major area of investigation concerns the use of various capital budgeting techniques (e.g. net present value, internal rate of return, and payback period). Other important areas of investigation include measuring and adjusting for project risk, using capital rationing, selecting hurdle rates, and conducting post audits. Additional survey research topics discussed include how firms measure project benefits, how firm goals relate to capital budgeting methods used, how firms consider future inflation in capital budgeting analysis, the use of real options, and methods of estimating residual value. While most studies discussed here focus on large U.S. firms, many focus on non-U.S. firms, multinational firms, multi-division firms, and small firms.

Keywords: capital budgeting; capital budgeting techniques; capital rationing; hurdle rates; internal rate of return; net present value; payback period; post audits; project risk

Chapter.  29975 words. 

Subjects: Financial Markets

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