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Article

M.J. du Toit and A. Pienaar

This article reports on the results of a survey on how companies listed on the main board of the JSE Securities Exchange SA make a capital investment decision in practice…

Abstract

This article reports on the results of a survey on how companies listed on the main board of the JSE Securities Exchange SA make a capital investment decision in practice. The respondents to the survey questionnaires provided answers regarding the methods that their companies use to evaluate capital investments, as well as to evaluate mutually exclusive projects. The results suggest that South African companies prefer to use the internal rate of return (IRR) and net present value (NPV) to evaluate capital investments. In addition, there appears to be a correlation between the methods that companies use and the size of their annual capital budget. Finally, a hypothetical problem was presented to the respondents, who were asked to choose between two mutually exclusive projects. Interestingly, the majority of the respondents chose the project which added the least value.

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Article

S. Paulo

The purpose of this paper is to contend that Fisherian analysis that is used to resolve ranking conflicts of mutually exclusive projects is misspecified, invalid, and…

Abstract

Purpose

The purpose of this paper is to contend that Fisherian analysis that is used to resolve ranking conflicts of mutually exclusive projects is misspecified, invalid, and cannot do what it purports to do. Misspecified and invalid models cannot realistically be operationalised, and are likely to result in incorrect valuations and misallocations of capital. An implication of these deficiencies is that it cannot satisfy the criteria prescribed by Rule 702 of the Federal Rules of Evidence of the USA, and as a consequence significantly impacts upon the admissibility of its use as part of expert witness testimony and the role played by the trial court in the USA. These deficiencies also place Fisherian analysis at risk of conflict with the Sarbanes‐Oxley Act of 2002, in particular Section 807 §1348 that deals with the use of invalid and unreliable valuation criteria.

Design/methodology/approach

A secondary survey of Fisherian analysis, recent USA legislation and the literature of corporate financial management was undertaken. Fisherian analysis is part of the capital controversy debate, and the Cambridge‐UK school devoted much time and effort in discussing issues germane to the controversy. The approach of corporate and managerial finance as evidenced by the literature, has been to unquestioningly recommend and implement a valuation criterion that is wrong and with little exception is based on numerical examples of such extreme disproportions as to qualify as inelegant examples of sophistry.

Findings

This paper contends that Fisherian analysis does not do what it purports to do, namely provide valid and reliable valuations for allocating capital. It is misspecified and invalid, is unlikely to be acceptable as expert witness testimony in terms of Rule 703 of the Federal Rules of Evidence, and if used for valuations and allocations of capital by listed corporations, can result in a conflict with the fundamental purpose and specific provisions of the Sarbanes‐Oxley Act of 2002. Application of Fisherian analysis effectively prostrates the definition and function of the cost of capital for it imposes the stricture of a constant cost of capital across all mutually exclusive projects with ranking conflicts irrespective of the differences in the characteristics of these projects.

Practical implications

Management of listed corporations that use invalid and unreliable valuation criteria not only endanger the financial wellbeing of the corporation by misallocating capital, but also expose themselves unnecessarily to the risk of not complying with legal requirements. The judiciary does not condone less than complete practice by those possessed of expert knowledge and skills, education, or seniority in corporate hierarchies, especially when the issues are clear cut.

Originality/value

The paper provides useful information on Fisherian analysis.

Details

International Journal of Law and Management, vol. 51 no. 6
Type: Research Article
ISSN: 1754-243X

Keywords

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Article

C.S. Agnes Cheng, D. Kite and R. Radtke

Capital budgeting plays an essential role in a firm's long‐term viability and survival. The capital budgeting process includes: identification of potential projects

Abstract

Capital budgeting plays an essential role in a firm's long‐term viability and survival. The capital budgeting process includes: identification of potential projects, prediction of possible outcomes, project selection, financing and implementation of the chosen project, and monitoring project performance (Mukherjee and Henderson, 1987). Although economic considerations should govern the capital budgeting decision, individual opinions and preferences often become primary factors affecting project selection.

Details

Managerial Finance, vol. 20 no. 7
Type: Research Article
ISSN: 0307-4358

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Article

W.K.H. Fung and R.C. Stapleton

Given the range of tools and techniques available for appraising capital projects, financial managers are confronted with the problem of selecting appropriate techniques…

Abstract

Given the range of tools and techniques available for appraising capital projects, financial managers are confronted with the problem of selecting appropriate techniques that adequately reflect their goals. This article explores the rationale underlying alternative measures of project profitability in order to discuss the relationship between various appraisal methods and the goals of management. Appraisal methods are introduced by way of numerical illustrations and diagrams which are summarised together with their underlying rationale into a single chart in order to facilitate easy reference.

Details

Managerial Finance, vol. 6 no. 2
Type: Research Article
ISSN: 0307-4358

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Article

G.A. Karathanassis

The paper compares the Net Present Value and the Internal Rate of Return Methods paying particular attention to Mutually Exclusive Projects. In addition it looks into the…

Abstract

The paper compares the Net Present Value and the Internal Rate of Return Methods paying particular attention to Mutually Exclusive Projects. In addition it looks into the reinvestment rate assumption concept. Using a different approach to those used to‐date, it is shown that the reinvestment assumption should not concern analysts, provided they use the Net Present Value Method.

Details

Managerial Finance, vol. 30 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

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Article

S. Paulo

The purpose of this paper is to draw attention to the fact that the certainty equivalent coefficient net present value criterion, CEC(NPV), in disregarding a fundamental…

Abstract

Purpose

The purpose of this paper is to draw attention to the fact that the certainty equivalent coefficient net present value criterion, CEC(NPV), in disregarding a fundamental requirement for the calculation of cash flows for purposes of discounted cash flow analysis, invalidates this capital budgeting criterion from the perspective of sound research methodology. The paper also investigates the impact of the UK Companies Act of 2006, the Sarbanes‐Oxley Act of 2002, and important reviews such as the Turner Review of 2009, the Walker Review of 2009, and the Review of the Combined Code of 2009 on this operationally invalid capital budgeting criterion, as well as its impact on the process of financial managerial decision making.

Design/methodology/approach

The CEC(NPV) as a discounted cash flow capital budgeting criterion was examined from the perspective of the axioms of cash flow estimation as well as from the definition of the cost of capital in order to ascertain the contribution of this criterion to financial management. The relevant sections of the UK Companies Act of 2006, the Sarbanes‐Oxley Act of 2002, the Turner Review of 2009, the Walker Review of 2009, and the Review of the Combined Code of 2009 were studied in order to establish whether the CEC(NPV) was able to satisfy the requirements of this legislation and these important reviews.

Findings

The CEC(NPV) is construct invalid and does not measure what it purports to measure: it over‐states financial viability. As a consequence, it does not meet the requirements of sound research methodology and therefore is at odds with the UK Companies Act of 2006, the Sarbanes‐Oxley Act of 2002, and falls foul of the Turner Review of 2009, the Walker Review of 2009, the 2009 Review of the Combined Code issued by the Financial Reporting Council. As such it cannot be endorsed by the Financial Services Authority.

Originality/value

The paper usefully shows that the CEC(NPV) denies financial managers application of Fisherian analysis for resolving conflicts in the rankings of mutually exclusive projects, and, the comparison of project cost of capital with their respective internal rates of return. Comparisons of the internal rate of return, not with the risk‐free rate (that is assumed to be a constant and which exhibits minimal variability in comparison with the cost of capital), but with the cost of capital cost of capital, are a sine qua non for managerial decision making, especially capital budgeting.

Details

International Journal of Law and Management, vol. 52 no. 6
Type: Research Article
ISSN: 1754-243X

Keywords

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Article

Martin Morgan Tuuli and Steve Rowlinson

Empowerment is a concept that means different things to different individuals. The factors that engender feelings of empowerment are thus multifarious. The purpose of this…

Abstract

Purpose

Empowerment is a concept that means different things to different individuals. The factors that engender feelings of empowerment are thus multifarious. The purpose of this paper is to focus on to the factors that empower individuals and teams in projects settings.

Design/methodology/approach

Using the critical incident technique (CIT), 122 critical incidents comprising 69 empowering and 53 disempowering experiences of 30 purposively selected construction professionals are elicited and analysed.

Findings

Adopting a broad frame of reference on the premise that empowerment of individuals and teams in project settings is associated with drivers and barriers related to: the individual; the team context; the organisation; and the projectmutually exclusive and exhaustive contextual influences within each frame of reference are identified. At the individual‐level, cultural values and factors related to the quality of relationships with leaders and colleagues emerged. At the team‐level, team context and leadership style are the key factors. At the organisation‐level, factors related to structure and culture emerged. At the project‐level, project characteristics, organisation, environment and technology‐related factors impacted the empowerment of individuals and teams.

Practical implications

Practically, the paper provides targets of concrete interventions by leaders and organisations desirous of fostering empowerment in project teams.

Originality/value

This paper adds to previous research in demonstrating the practicality of the CIT in construction specific research and the credibility and trustworthiness checks employed are exemplary of measures researchers using qualitative methodologies can take to assert the credibility of their findings and conclusions.

Details

Engineering, Construction and Architectural Management, vol. 17 no. 1
Type: Research Article
ISSN: 0969-9988

Keywords

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Article

Ordell Calkins and Mohammad Sangeladji

Use of the internal rate of return (IRR) and the net present value (NPV) techniques in evaluating capital investments has been advocated by many financial writers. They…

Abstract

Use of the internal rate of return (IRR) and the net present value (NPV) techniques in evaluating capital investments has been advocated by many financial writers. They almost always assert that these methods are superior to the more widely used payback and accounting rate of return techniques. The usual reason given centres around the concept of the time value of money, a factor that is absent in the latter method. Without doubt there is merit in this reasoning.

Details

Management Decision, vol. 10 no. 1
Type: Research Article
ISSN: 0025-1747

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Article

Avi Rushinck

Capital Budgeting is defined as planning and financing long term investment projects in both the private and public sectors (Skierkowski, 1981). In the literature, there…

Abstract

Capital Budgeting is defined as planning and financing long term investment projects in both the private and public sectors (Skierkowski, 1981). In the literature, there is a great deal of discussion about CB in the public sector (Bradley and Frey, 1979), as well as emphasis in the private sector (Murdick et.al., 1980). This paper concentrates on the private sector since it involves the profitability issue, which is strongly affected by CB decisions; although, many other CB issues are in common for both private and public sector organizations. Therefore, this study presents an integrated approach that can be applied to both profit as well as to non‐profit organizations.

Details

Managerial Finance, vol. 9 no. 1
Type: Research Article
ISSN: 0307-4358

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Abstract

Details

Handbook of Transport Strategy, Policy and Institutions
Type: Book
ISBN: 978-0-0804-4115-3

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