Capital budgeting in Europe: confronting theory with practice

Abstract

Capital budgeting is an important area of financial management. It is a process used to determine whether firm's long–term investments are worth the funding of cash through the firm's capitalisation structure. Different techniques are used: the payback period, the accounting rate of return, the present value and the internal rate of return and the profitability index. This research presents an analysis of capital budgeting in three different countries: Italy, France and Spain. The results revealed that PP, followed by net present value, is the most used method, but there is a difference between large and small firms. This research has demonstrated that capital budgeting decision–making is a complex process and that it is undervalued by SMEs. The limitations of the paper are the result of its very nature: it is a largely conceptual paper.