The capital budgeting decision is one of the most important financial decisions in business firms. In this case, Variety Enterprises Corporation (VEC) is considering whether to invest in a new production system. To determine if the project is profitable, VEC must first determine the weighted...

We compare the concept of Economic Value Added (EVA) with the traditional Discounted Cash Flows (DCF) method of investment appraisal. We find that DCF suffers from dynamic inconsistency and may approve suboptimal investment decisions. In contrast, EVA does not suffer from these shortcomings and...

I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a...

We characterize the optimal dynamic mechanism for capital budgeting and managerial compensation. The division manager privately observes the project productivity at each point in time as well as an initial signal that governs the productivity evolution. We show that the optimal allocation can be...

This paper seeks to shed further light on the capital budgeting techniques used by Spanish companies. Our paper posits that the gap between theory and practice might be related to the nature of sources of value and to the efficiency of mechanisms aligning managerial and shareholder incentives,...

When a firm has minimal agency and informational asymmetry problems it should make efficient capital budgeting decisions. Many firms over-invest prior to CEO turnover, halt investments in the period surrounding the turnover, and then greatly increase their level of expenditures. Empirical...

As presented in leading corporate finance textbooks the predominant method for making capital budgeting decision is discounted cash flow analysis. The primary benefit of this approach is that it allows for different discount rates to be used for different projects. In this paper, I argue that...

This paper introduces a new method, different from the discounted cash flow (DCF) method, for the first time, to estimate NPV and IRR. This method makes use of the capital amortization schedule (CAS). The functional relationship between the closing balance in CAS and the NPV and IRR are derived...