Capital Budgeting Model Research Articles

A Monte Carlo simulation case study on blueberries from Mexico

Abstract Global blueberry production more than doubled during the last decade. In Mexico, the production of this fruit has grown faster than globally, positioning this country among the top five international blueberry-producing regions. This case study focuses on a prospective investor planning to grow blueberries in Mexico and export most production to the U.S., the largest producer and consumer of fresh blueberries. A high-technology producer growing blueberries under high tunnels in western Mexico is featured in this article. The case study was researched using a combination of field visits to blueberry producers, collaborative work with an industry consultant, and academic research. The article provides industry statistics on blueberries in Mexico and globally over the last decade. In addition, it describes how the authors conceptualized and developed discounted cash flow models to evaluate this potential investment. Despite the importance of blueberries from Mexico, there is a need for financial models to assess the profitability and risk of growing blueberries in that country. Students solving this case are expected to identify risks and opportunities in the industry and conduct Porter’s five forces competitive analysis. In addition, students will mainly evaluate the results of a stochastic capital budgeting model.

The influence of a Pandemic on Decision Making

A Discussion of Capital budgeting models will be discussed in this manuscript to bring forth the notion that present value of cash flows is often improperly estimated. Financial models utilized in the decision analytic process. In particular, intellectual property rights and other intangible assets often are often not considered in accounting estimation processes utilized in financial accounting (Jarrett, 2021). A decision maker often utilizes misestimates of the present value of cash flow resulting in less-than-optimum capital budgeting decisions. Decisions to abandon for salvage, sale and other disposal methods improve when the present value of intangibles and property rights are included in the decision process. In particular, this last statement improves the estimation process in financial accounting, finance and abandonment and decision theoretic decisions in capital budgeting which are well-founded results in abandonment of property in both intellectual f this study as well as to present well-founded processes to improve abandonment in capital budgeting decisions involving cost estimation, matching of costs and revenues and equivalent problems in the recognition revenues with costs in financial decision processes.

Estimation Theory in Financial Accounting as It Applies to Valuing Intellectual Property Assets

The abandonment option under various capital budgeting models are discussed in this study to illustrate the notion that present value of cash flows is often improperly estimated in financial models utilizing decision analytics in estimation theory as it applies in financial accounting. In this study, intellectual property rights and other intangible assets which are often not considered in the accounting estimation processes utilized in financial accounting. An investor/analyst often misestimates cash flow resulting in less-than-optimum capital budgeting decisions. This is especially a problem when actions to abandon for salvage and other similar decisions improve when the present value of intangibles and property rights are included in the decision process. This last statement is the goal of this study as well as to present well-founded processes to improve abandonment and similar decisions in capital budgeting decisions. The estimation problem in financial accounting is included in the analysis to accomplish this goal.

The Value of Intangibles for Decision Analysis under the Influence of a Pandemic

The abandonment option under various capital budgeting models are discussed in this manuscript to bring forth the notion that present value of cash flows is often improperly estimated in the financial models utilized in the decision analytic process. In this study, intellectual property rights and other intangible assets often are often not considered in accounting estimation processes utilized in financial accounting. A decision maker often utilizes misestimates of the present value of cash flow resulting in less-than-optimum capital budgeting decisions. Decisions to abandon for salvage and other similar decisions improve when the present value of intangibles and property rights are included in the decision process. This last statement is the goal of this study as well as to present well-founded processes to improve abandonment and similar decisions in capital budgeting decisions. The estimation problem in financial accounting is included in the analysis to accomplish this goal. In addition the role of a Pandemic is emphasized

Revisiting discounted cash flows model as a capital budgeting decision tool

Purpose- In this study, the classical discounted cash flows (DCDF) model is revisited and the input factors of the model are analysed in details. Methodology- A model analysis approach is used in this research. The fundamental assumptions and the input factors (cash flows, time period, risk, discount rate, etc.) of DCF model are questioned. Findings- NPV and IRR are two methods using discounted cash flows and oftenly applied for capital budgeting decisions. The assumptions used in the DCF analysis are very strong and not fitting well in the reality of practical life. Economic life of the project may be much longer or shorter than projected in the analysis. The computation of discount rate bases on subjective interpretations (weights of capital components, cost of debt, opportunity cost of equity). Estimation of cash flows is the most critical input of the analysis but generally the least weighted factor (CF or FCF, inclusion of only relevant cash flows, depreciation and interest expenses, installments, credit sales and purchases, etc.). Risk adjustment can be made either on the discount rate or expected cash flows. Moreover, the analysis of international capital investments makes the issue more complicated. Also, the inclusion of real options adds an economic value to the analysis. Conclusion- DCF is not straight forward a capital budgeting model anyone can easily use. The application of DCF requires expertise and a picky view on details. Nevertheless, the acceptance of capital investments utilizing DCF method can not be independent of overall company strategic goals.

Analysts’ Forecasts, the Abandonment Option and Intellectual Capital

The abandonment option under various capital budgeting models are discussed in this manuscript to bring forth the notion that present value of cash flows is often improperly estimated in the financial models utilized in the decision analytic process. In this study, Intellectual Property Rights and other intangible assets often are not considered in accounting estimation processes utilized in financial accounting. A decision maker often utilizes misestimates of the present value of cash flow resulting in less than optimum capital budgeting decisions. Decisions to abandon for salvage and other similar decisions improve when the present value of intangibles and property rights are included in the decision process. This last statement is the goal of this study and to present well founded processes to improve abandonment and similar decisions in capital budgeting decisions. The estimation problem in financial accounting is included in the analysis to accomplish this goal.

Capital Budgeting Model and Sensitivity Analysis of the Conventional Oil Production Sharing Contract (PSC) Fiscal Systems: Empirical Evidence from Indonesia

Oil is a vital commodity that controls the livelihood of people. It is also the main resource of state revenue. The oil industry in Indonesia has started since 1883. However, only 40 percent of the total sedimentary basin in Indonesia has been explored since that time (Ministry of Energy and Mineral Resources of Republic of Indonesia, 2015). Accordingly, the major fields are getting drain, while the domestic consumption of oil is increasing. Low investment is one of the factors that cause the declines of oil production. Working Areas (WA) which had been offered to the potential investors by the Government of Indonesia (GOI) during the period ended September 10, 2015, were unsold, followed by unsuccessful of seven WAs offered in the period from July 18 to October 28, 2016, due to an unattractive terms and conditions of PSC Fiscal Systems in the decreasing of oil price situation currently. Oil business requires high capital, high technology, high risks, long terms commitment, but high returns. Therefore, GOI always depends on the private investor to run exploration and exploitation of oil mining. The purpose of this study is to measure the feasibility of oil industry investment and to examine the attractive terms and conditions of PSC Fiscal Systems. The data were collected from the ten PSC Fiscal Systems which had been started the business since 1968 - 2014. Capital Budgeting Model indicators: Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Weighted Average Cost of Capital (WACC) were used to analyze the data and sensitivity analysis. The finding shows that the attractive terms and conditions of PSC Fiscal Systems are a maximum split of 50 percent for GOI, under controllable Cost Recovery (CR), the oil price of USD 50.00/barrel, and WACC <20%. The authors believe that the findings will be beneficial for GOI and potential oil investors to carry out a fair negotiation, to come up with a win-win solution.

Aplikasi Capital Budgeting dalam Penentuan Keputusan Investasi Kamar dan Ballroom Di Hotel Panorama Lembang

This research's title is "Applications of Capital Budgeting Method in Feasibility Study of Rooms and Ballroom Investment at Hotel Panorama Lembang", the purpose of this research are to know the feasibility of hotel investment based on financial projection aspect which using Capital Budgeting Method at Hotel Panorama Lembang. The feasibility of investment evaluate by the tools of capital budgeting model, which is have aspect of Discounted Payback Period, Net Present Value, Internal Rate Of Return, and Profitability Index in Hotel Panorama Lembang. The results of this research from the financial projection evaluated with the tools of capital budgeting evaluation which have the results can be seen that investment is feasible, as calculated by the method of discounted payback period is 8 years and 2 months based on hotel evaluation and 6 years and 11 months based on writer's evaluation, net present value in positive result (NPV > 0) in the amount of Rp. 1.743.693.325 , Internal Rate of Return is higher than the discounted factor of 12% in the amount of 23.9303%, profitability index is in positive result higher than 1. Based upon this calculation summarised that the feasibilty of investment based on financial projection are accepted. Based on the evaluation from the capital budgeting method, the criteria of investment at Hotel Panorama Lembang are accepted. The management used the methods which doesn't improve a good result in feasibility. Methods that used by the author more improve a good result in investing decisions, because using a selection of forecasting methods for future revenues. The author used a time series forecasting methods to improve more revenues for hotel. This forecasting method can provide the closest forecast result and the highest rate of accuracy. The author recommends to the management of Panorama Hotel Lembang to continue and accepted the investment of new rooms and ballroom. Considering the result of a feasebility study with a capital budgeting methods are accepted. The author also recommends to the management of Panorama Hotel Lembang to use a proper forecasting methods, such as time series methods.

Capital Budgeting Theory and Practice: A review and agenda for future research

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. It has analyses of various approaches, such as Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE), SciVerse ScienceDirect (Elsevier), Informa - Taylor & Francis (CrossRef), Wiley (CrossRef), Business (JSTOR), Arts & Sciences (JSTOR), Proquest ,MEDLINE (NLM), and Wiley Online Library. Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them.
 Keywords: Capital budgeting theory and practices, capital budgeting tools for incorporating risk, discount rate

Managing Resource Allocation: Personal Reflections From a Managerial Perspective

The problem of resource allocation is central to economics. It is also central to the strategic management of companies. Despite considerable research by management scholars describing the process in firms first carried out in the 1960s and continuing since then, management theory of the process remains wedded to a financial model of capital budgeting that poorly fits the problem facing companies. Consulting firms stepped into the gap with models of business portfolios that helped frame the resource allocation choices among business units. But over time, changes in the capital markets, in the flows of technology, and in the patterns of global competition have meant that the dilemmas facing company managements are far more complex than the models and concepts academic researchers use to describe them. This may well be because the forces that must be taken into account are cognitive, organizational, and interpersonal as well as economic and thus cross the lines of academic disciplines, while the time horizon of these problems exceeds the scope of a typical academic research project. There is important research to be done.

A goal programming capital budgeting model under uncertainty in Construction industry

Due to the increase in investments in construction projects and the lack of practical models in this area developing new practical models is essential. In this paper, researchers suggest a new model in which (1) its assumptions are adopted based on the real world, (2) goal programming is used because of the soft nature of the budget constraints; and (3) risk of variations in cash flows is considered. The presented model chooses the most profitable portfolio of projects and determines their respective financing resources, area under construction, and pre-sale and sale amounts for each period such that the cumulative cash flow at the end of the time horizon is maximized. The fuzzy analytic hierarchy process (FAHP) is used to determine the weight of the objectives. The exact solution to the model is obtained using the ILOG CPLEX software. The presented solution seems efficient; since it yields very small elapsed times to exactly solve the real-world-sized problems. Also, the sensitivity analysis is performed and the results are deliberately studied and analyzed. Parameters such as pre-sale prices, mean and variance of the sale price and construction costs are among the highly sensitive parameters.

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

ABSTRACTThis paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

Capital Budgeting Theory and Practice: A Review and Agenda for Future Research

The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE) , SciVerse ScienceDirect (Elsevier) , Informa - Taylor & Francis (CrossRef) , Wiley (CrossRef) , Business (JSTOR) , Arts & Sciences (JSTOR) , Proquest , MEDLINE (NLM) , and Wiley Online Library . Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them. Recent studies lent credence on the use of more sophisticated capital budgeting techniques along with many capital budgeting tools for incorporating risk. Notwithstanding, it drew a distinction between developed and developing countries. Moreover, factors impinging on choice of capital budgeting practice were identified, and bereft of behavioral finance and event study methodological approach were highlighted. More extensive studies are imperative to build robust knowledge of capital budgeting theory and practice in the chaotic environment. This research was well thought out in its design and contributed by stating the known and unknown arena of capital budgeting during the last two decades. This scholarship facilitates to academics, practitioners, policy makers, and stakeholders of the company.

Issues in real options with shadow costs of incomplete information and short sales

This paper presents the valuation of real options and the capital budgeting models within shadow costs of incomplete Information and short sales. Shadow costs are sunk costs in the spirit of Merton's (1987) model of capital market equilibrium with incomplete information.The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu, Li and Wei (1996) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales.Shadow costs are used in standard discounted cash flow techniques and real options. The justification of shadow costs in real projects is based on the observation that R&D needs to be done before investment decisions. The main results regarding real options and shadow costs of incomplete information and short sales are proposed by extending the analysis in Bellalah (1999, 2000) and Bellalah and Wu (2009).Our results have important implications in terms of pricing derivative assets and different types of real options. In particular, this framework can be easily implemented in investment decisions and the valuation of flexibility embedded in real projects. In fact, several investment decisions under uncertainty can be reformulated and their results can be implemented in the presence of incomplete information and investment constraints.

A Probabilistic Capital Budgeting Model for New Product Development under Stage-Gate Process

Stage-gate model for new product development (NPD) and for any research and development (RD each stage is a set of research activities and gates are milestones at which decisions are made based on predetermined criteria. In this paper we developed a capital budgeting model for a typical 5-stage, 5-gate process to be used for appraising commercial viability of the NPD at Stage 2 which will serve as one of the decision making criterion at Gate 3. Because in an NPD project, completion costs (capital investments), completion times, and future cash flows are uncertain, we developed the Pert-Beta probability distribution to encounter for the randomness of these variables. Furthermore, we suggested the model can be applied to real case NPD projects with the Monte Carlo Simulation approach. We then verified the workability of the model by applying it to a notional NPD project and demonstrated that all decision variables reach steady state in the Monte Carlo Simulation calculations.

The Effect of Information System Precision on Honesty in Managerial Reporting: An Experimental Examination Incorporating Operating Uncertainty

We apply insights from a model of social norm activation to an agency model of capital budgeting to develop a positive behavioral relation between information system precision and honesty in managerial reporting. This relation is based on the ability of a precise information system to reduce information asymmetry between the owner and the manager and thereby promote the activation of an honesty norm. Next, we use this behavioral theory to predict that high operating uncertainty in the information system offsets this positive relation by allowing the manager to hide behind the uncertainty and thereby evade the honesty norm. Using an experimental agency setting in the literature, we find evidence consistent with our behavioral theory. Information system precision increases managerial honesty under low but not under high operating uncertainty and managerial honesty is the highest under a precise information system with low operating uncertainty. An analysis of exit questionnaire responses confirms our underlying behavioral theory based on social norm activation and norm evasion. This study helps explain prior experimental results and emphasizes the importance of considering operating uncertainty in determining the optimal information system.

CAPITAL BUDGETING: A CRITICAL MODEL FOR STRATEGIC DECISION MAKING IN MANUFACTURING COMPANIES IN CROSS RIVER STATE, NIGERIA.

This study examined capital budgeting as a critical model for strategic planning in manufacturing companies in Cross River State, Nigeria. The objectives of the study were to examine the degree of relationship between the adoption of NPV model and the return on investment in manufacturing firms in Nigeria; to investigate the extent to which capital budgeting models could influence strategic planning in manufacturing firms in Nigeria. In order to achieve these objectives, three research hypotheses were tested at 5% level of significance. The survey research design was adopted and a well structured questionnaire was constructed to gather data for the study. The questionnaire was administered on 108 respondents comprising the management and operational staff of quoted firms in Cross River State. The Pearson product moment correlation statistical technique was applied. Findings resulting from the test revealed that capital budgeting model influenced significantly strategic planning and managerial decisions. The NPV model was found to be positively correlated with manufacturing firms returns on investments. Based on these findings, it was recommended that corporate planners should train management and line staff on the right application of capital budgeting models. Managers were encouraged to constantly appraise investments alternatives weigh in the results of capital budgeting estimation and their strategic planning process.

Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?

In this paper I compare a traditional demand oriented model of bank lending with its focus on short-term interest rates in the money market, to a non-traditional capital budgeting model of bank lending based on movements in share valuations for the Euro area. Using non-nested hypothesis tests, omitted variables tests, and Granger Causality tests, I reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions (MFI's) in the Euro area. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions and allocation of resources in Europe. One possible policy implication of this research is that the central bank should try and stabilize stock prices in order to achieve their goal of stabilizing bank lending and the economy.

MICRO AND MACRO ECONOMIC ANALYSIS OF CLOUD COMPUTING

A 2012 Forester Consulting survey reported that both IT and business managers have been struggling with the complexity and differing perspectives concerning cloud computing. Business leaders CIOs and IT professionals often make decisions concerning choices on architectures infrastructures, platforms, and frameworks based on costbenefit, capital budgeting or business policy decision-making models. While there has considerable research into cloud technologies, there has been less research into the short term and long term economic effects of implementing cloud technologies within the organization, industry or economy. This paper studies the potentials of Micro and Marco Economic analysis to provide better information for cloud computing technology policies

Is Renting Better? A Review of the Home Ownership Decision amid Increasing Risk

There has always been an avid debate on the merits of owning versus renting a residence. There is a commonly accepted sentiment that owning a home is a wise investment. However, this sentiment is often unproven or supported with non-substantial evidence. The scholarly literature on the buy versus rent decision has conflicting results. Further, recent events in the US residential real estate market suggest increased asset riskiness which may have a dramatic effect on home ownership. Our research uses a capital budgeting model, similar to the lease versus buy analysis, with the output being the present value of buying instead of renting. The present value model includes the difference in cash flows between buying and renting for two standardized holding periods. A key contribution of the paper is a more accurate estimate of required return on equity, the discount rate in our present value model. As real estate values have recently demonstrated greater risk and the capital structure of homeowners may be highly leveraged, the cost of equity is higher than often suggested. The benchmark model uses point estimates for each variable with subsequent models including scenario analysis for key variables. The results suggest buying is better, in the benchmark model as well as scenarios allowing rents, home appreciation, mortgage rates and required return to vary. However, most scenarios show negative present values are possible, which contrasts the historic view that home ownership always has a positive return.