SOPHISTICATED METHODS OF CAPITAL BUDGETING AN ECONOMICS OF INTERNAL ORGANIZATION APPROACH

The traditional approach to capital expenditure analysis is based on the neoclassical economic paradigm. According to this paradigm, managers are assumed to strive for profit maximization in an effort to maximize the wealth of the firm's stockholders. In their pursuit of this objective, the “rational economic” manager is assumed to be able to gather and process all relevant information, subject to the standard notion of cost/benefit analysis. Divergence of preferences between managers and owners, and concerns related to asymmetric information, are usually ignored. The firm itself is treated as a production function geared to meeting the profit maximization objective, with the transactions of the external marketplace (through the price system) being the ultimate organizer of the firm's activities.