Administrative Organization in Capital Budgeting

Abstract

I NVESTMENT decisions are inherently more complicated and less subject to rule-of-thumb treatment than are most of the decisions of a business firm relating to day-to-day operations. They relate to the long run rather than the short run, and a mistake with respect to them is less easily rectified than in the case of more routine decisions. For the most part they are unique in some significant sense, in that no two investment decisions ever involve exactly the same circumstances. Business judgment of a high order is involved, because they are long-run decisions which deal with an uncertain future environment about which knowledge is imperfect. To an important extent the art of business management rests in the ability of the businessman to formulate, on the average, expectations about this uncertain future which are basically correct, as attested by realized results. The role of the businessman is one of making decisions; act he must, but unfortunately he can never have sufficient information to serve as a basis of such action. The success with which firms make correct investment decisions is dependent upon how well they are organized to meet the challenging situation remarked upon. This involves the details of administrative organization and procedure as well as the application of appropriate economic criteria. The latter are applied to investment opportunities by the personnel of the firm within the framework established by the former. This paper gives attention to what the widely scattered literature has to offer pertaining to administrative organization and procedures in connection with capital budgeting. Much of the literature consulted was found in technical journals or bulletins written by persons actively engaged in business operations, and, presumably, the procedures described by these industry representatives and surveyed here depict actual capital-budgeting practices.