Classifying capital projects for top management decision-making

Abstract

This paper is an attempt to redress a perceived imbalance in the research and literature of capital project analysis. There is a plethora of work on the quantitative aspects of project analysis, yet empirical surveys show limited use of such techniques. There is limited work on the organizational processes of project selection, but there appears to be little or no work taking place on formal organizational systems for project selection. The more quantitative literature generally takes a deductive approach using a model developed from microeconomics based on the assumption that the objective of the firm is the maximization of owners' wealth. In this paper it is argued that there is a need to take an inductive approach and place the capital investment decision in its organizational setting. This paper looks at the formal capital budgeting system within the corporate setting. It is suggested that the specific capital investment decision takes place against the background of a set of policies and constraints, which are more or less explicit. The selection of corporate projects is a complex issue, but to provide some structure so that the problems can be processed by the organization, a capital budgeting system is designed. Part of this system is the classification of projects according to some criteria. It would therefore appear that the purpose of this classification system is to aid capital project selection within an organizational context. A consideration of classification systems for capital projects is undertaken, this is followed by a survey of the classification systems which have been proposed in the capital investment literature. Finally a classification system based upon specific criteria is proposed.