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Briefly describes the nature and importance of capital investments and why managers of all functional areas should understand the basics of analysis. Reviews conceptual issues. Develops important perspectives for corporate leaders, managers and analysts. Provides practical guidelines for analysis. Furnishes a useful format for analysis easily adaptable to spreadsheet analysis. Illustrates techniques of analysis using a sample capital project. Interprets the results in a common‐sense manner and in terms of the contribution of the project to shareholder value. Addresses issues at a level appropriate for each professional manager regardless of their area of expertise and functional assignment.

Interviews in South Korea, Taiwan, Singapore, and India indicate net present value (NPV) is not widely employed in making capital investment decisions in these newly industrialized and developing countries. It is not from lack of knowledge about net present value: rather, it is due to (1) widespread violation of the assumptions underlying NPV, (2) the high risk/high return nature of the capital investments, and (3) the decision‐making process employed in making capital investment decisions. These same three conditions exist for many capital investment decisions made by firms in developed countries. Only by abandoning the static NPV approach, building in real options, and understanding and building in the decision‐making process will further advances be made in capital budgeting decision‐making. One of the key paradigms in finance is net present value (NPV). In order to maximize value, managers should accept all positive NPV investment projects, and reject all negative NPV projects. The issue becomes more complex when uncertainty is introduced, or, as in recent years, when real options to defer, abandon, expand, etc. are incorporated into the decision‐making process [e.g., Dixit and Pindyck (1994) and Trigeorgis (1995 and 1996)]. However, with these exceptions, the state of the art in capital investment decision‐making revolves around the simple statement—take all positive NPV projects. In practice, evidence from surveys and discussions with corporate executives indicates the message taught for the last 30 years in business schools has been heard and, to a large extent, acted upon by larger U.S., Canadian, and British‐based firms. While larger firms in North America, and to a lesser extent Western Europe, generally employ the static, or traditional, NPV framework for making, or assisting in making, capital investment decisions, less is known about the decision‐making process employed by firms in other parts of the world. The question addressed in this study is: “Do firms in other parts of the world, especially in newly industrialized or developing countries in the Asia Pacific region, employ NPV for making capital investment decisions?” The purposes of this study are threefold: (1) to report the results of a series of open‐ended interviews conducted in South Korea, Taiwan, Singapore, and India about the capital investment decision‐making process employed; (2) to understand why NPV is not widely employed in making capital investment decisions in these newly industrialized and developing countries; and, most important, (3) to indicate that NPV and the capital budgeting decision‐making process need rethinking and refocusing to make them more effective—in all countries, whether developed, newly industrialized, or developing. The paper proceeds in the following manner. Section I provides an introduction to the study. In Section II the results of the interviews are presented. In Section III patterns that emerged during the interview process are presented, along with a number of specific examples of the types of capital investment decisions being considered. In Section IV the assumptions underlying NPV are examined, and then risk/return and the decision‐making process are considered. Section V contains the discussion and conclusions.

This issue of Managerial Finance focuses on factors related to the critical long term decisions for a firm. What it should do, and what capital investments are necessary to attain its goals. The right goals, the appropriate capital resources, and effective management will lead to success. Capital investments are for the tomorrows. That characteristic of capital investments must command attention from corporate leaders and managers.

The purpose of this paper is to explore the impact of perceived risk on the procedural rationality of the decision process rather than decision choices or outcomes. The moderating roles of attainment discrepancy and organizational slack are also explored.

These relationships, motivated by behavioral theory, are tested using survey data of capital investment decisions in a sample of 128 public firms in the USA.

The findings suggest an inverted‐U shaped relationship between perceived risk and procedural rationality. In addition, absorbed slack and attainment discrepancy played moderating roles on the perceived risk‐procedural rationality relationship.

This study has several implications for research. First, the influence of risk is extended beyond decision outcomes to include decision processes. Second, the core arguments of behavioral theory, including uncertainty avoidance and decision context, appear to hold for the decision process. However, the effects of risk appear to be in the form of an inverted U‐shaped relationship, differing from prior behavioral theory research related to decision outcomes.

Perceived risk and the organizational context can lead to differing approaches to making decisions. As perceived risk increases, managers appear to alter the extent of information gathering and analysis. Organizations may consider designing different decision processes for different situations that take these managerial tendencies into account.

The contribution of this study is the extension of behavioral theory explanations of risk from decision choices or outcomes to the procedural rationality of the decision process. The findings show that risk has a non‐linear influence on the procedural rationality of the decision process.

Mergers and acquisitions (M&A) are arguably one of the CEOs greatest challenges, and there is a critical need to get these decisions right. It is clear that no single theory is adequate to describe or inform how M&A are evaluated in uncertain conditions, but there are several that offer partial explanations or at least contribute toward our understanding of how managers can deal with the uncertain environment and assess the likely risks associated with M&A. The literature suggests how relevant theories might be aggregated to make sense of strategic investment decision and investment appraisal techniques in an organizational context and considers the implications for further research in this important area of M&A. This chapter focuses on strategic investment appraisal, and draws together a variety of theoretical perspectives, especially from the field of psychology, which may be unfamiliar to both scholars in and practitioners.

Explores approaches to the assessment of capital investment proposals, and proposes a systematic investment analysis model to classify projects, and to show the relationship between factors influencing an analysis as well as to indicate the range of information necessary for a satisfactory assessment. Also discusses criteria for acceptance of proposals to spend capital on productivity improvement methodologies presented in the form of decision trees.

There are two ways in which the risk of a capital project can be described. This article outlines these two approaches: Sensitivity Analysis and Probability Analysis, and emphasises the connection between the two methods. The output of a computer model of the sensitivity of the project to underlying factors is used as input for a probability analysis. The methods are illustrated with a case study, the MM Co Ltd.

The adoption of several basic financial management practices is examined for a group of New York dairy farms. The study provides estimates of the extent to which various business analysis and control, investment analysis and decision making, and capital acquisition practices have been adopted. Many practices, such as net present value analysis, are not widely adopted by farmers. The relationship between the adoption of financial management practices and farm profitability is also examined. Results suggest that the adoption of financial management practices, such as using investment analysis techniques, significantly impacts farm financial performance.

The purpose of this article is to evaluate current techniques in capital budget decision making in Canada, including real options, and to integrate the results with similar previous studies.

A mail survey was conducted, which included 88 large firms in Canada.

Trends towards sophisticated techniques have continued; however, even in large firms, 17 percent did not use discounted cash flow (DCF). Of those which did, the majority favoured net present value (NPV) and internal rate of return (IRR). Overall between one in ten to one in three were not correctly applying certain aspects of DCF. Only 8 percent used real options.

One limitation is that the survey does not indicate why managers continue using less advanced capital budgeting decision techniques. A second is that choice of population may bias results to large firms in Canada.

The main area for management focus is real options. Other areas for improvement are administrative procedures, using the weighted average cost of capital (WACC), adjusting the WACC for different projects or divisions, employing target or market values for weights, and not including interest expenses in project cash flows. A small proportion of managers also need to start using DCF.

The evaluation shows there still remains a theory‐practice gap in the detailed elements of DCF capital budgeting decision techniques, and in real options. Further, it is valuable to take stock of a concept that has been developed over a number of years. What this paper offers is a fine‐grained analysis of investment decision making, a synthesis and integration of several studies on DCF where new comparisons are made, advice to managers and thus opportunities to improve investment decision making.

Effective use of capital is an important strategic tool for any manufacturing company operating in today’s high technology and capital intensive environment. This purpose of this paper is to carry out an investigative study into strategic business processes for capital effectiveness practices (CEP) in industry, by means of a literature review, a survey of a sample of UK and US companies and a case study of the Chemco Corporation.