Showing papers on "Capital budgeting published in 1983"

Measuring manufacturing performance: a new challenge for managerial accounting research

Abstract: Problems with the performance of U.S. manufacturing firms have become obvious in recent years. Japanese and Western European manufacturers are able to produce higher quality goods with fewer workers and lower inventory levels than comparable U.S. firms. The ability of foreign firms to become more efficient producers has gone largely unnoticed in the education and research programs of many U.S. business schools. A much greater commitment to understanding the factors critical to the success of manufacturing firms is needed. While an understanding of the determinants for successful manufacturing performance will require contributions from many disciplines, accounting can play a critical role in this effort. Accounting researchers can attempt to develop non-financial measures of manufacturing performance, such as productivity, quality, and inventory costs. Measures of product leadership, manufacturing flexibility, and delivery performance could be developed for firms bringing new products to the marketplace. Expanded performance measures are also necessary for capital budgeting procedures and to monitor production using the new technology of flexible manufacturing systems. A particular challenge is to de-emphasize the current focus of senior managers on simple, aggregate, short-term financial measures and to develop indicators that are more consistent with long-term competitiveness and profitability.

Risk, inflation, and the stock market

Abstract: Most explanations for the decline in share values over the past two decades have focused on the concurrent increase in inflation.This paper considers an alternative explanation: a substantial increase in the riskiness of capital investments. We show that the variance of firms' real gross marginal return on capital has increased significantly, increasing the relative riskiness of investors' returns on equity, and that this can explain a large part of the market decline. We also assess the effects of increase in the mean and variance of the inflation rate, and a decline in firms' expected return on capital.

An analysis of the financial management techniques currently employed by large u.s. corporations

Abstract: Economic conditions have placed increased importance upon rigorous financial analysis. In order to determine which analytical techniques are currently emp loyed by management, a questionnaire was sent to each fm on the May 1980, FORTUNE 500 list. The researchsought to establish a profile of the respondents' organizational structure and to identify the primary procedures used in risk assessment, working capital management, capital budgeting, and operations research modeling. The results do suggest a basic profile of the more active employers of analytical techniques. Relatively sophisticated capital budgeting procedures appear to be accepted across most industries, and many firms support their decision making with a “package” of formal tools.

Assembly Line Balancing with Processing Alternatives: An Application

Abstract: The conventional approach to the assembly line balancing problem assumes that the manufacturing methods to be used have been predetermined. However, in practice the design engineer has several alternatives available in the choice of processing, typically involving a trade-off between labor or capital intensive options. The choice of manufacturing method is frequently viewed as an investment or capital budgeting decision, contrasting projected savings in labor cost with the additional fixed cost for the more capital intensive alternatives. The manufacturing tasks based on the selected processing alternatives are then assigned to work stations so as to minimize the number of work stations i.e., labor costs necessary to achieve a desired production rate. This paper describes a method of simultaneously considering both the choice of manufacturing alternatives and the assignment of tasks to stations so as to minimize total costs labor and fixed over the expected life of the production line. The importance of considering these decisions jointly results from the fact that the benefits obtained from specific manufacturing alternatives should not be limited to anticipated labor savings alone. The true measure of achievable labor savings can only be determined after an assignment of tasks to stations has been chosen. For instance, although a processing alternative may reduce the total work content of a set of tasks, if the resulting line balancing assignment does not reduce the number of stations required to achieve a desired production rate, the assumed savings will not be achievable and will serve only to increase the idle time of the line. On the other hand, an apparently trivial reduction in the time to complete a certain task may lead to a more efficiently balanced line, producing a much greater real savings in labor cost than had been anticipated, due to a reduction in both work content and idle time for the line. The combined processing alternative line balancing problem can be formulated as an integer programming problem. Two alternate formulations are provided which differ in the degree of flexibility in selecting a cycle time. A branch and bound procedure is described for the fixed cycle time situation which takes advantage of the special structure of the problem to provide an efficient method capable of solving problems of practical interest. The effectiveness of the proposed procedure is demonstrated by application to an actual redesign of an assembly line for a major auto-industry supplier.

A Review of Recent Trends in Formal Capital Budgeting Processes

Abstract: (1983). A Review of Recent Trends in Formal Capital Budgeting Processes. Accounting and Business Research: Vol. 13, No. 51, pp. 201-208.

On Optimal Asset Abandonment and Replacement

Abstract: Numerous studies in recent years have emphasized the importance of accounting properly for abandoment value in capital budgeting (see [1], [4], [7], [10], and [11]). For a variety of reasons, a project need be neither physically exhausted nor have negative cash flows to be abandoned. Robichek and Van Home [10] suggested that a project should be abandoned in any period in which the present value of future cash flows does not exceed its abandonment value. In a modification of this rule, Dyl and Long [4] proposed that the firm give consideration to all possible future abandonment opportunities. They argued that abandonment need not occur at the earliest possible date that the abandonment condition is satisfied, but rather at the date that yields the highest NPV over all future abandonment possibilities. A generalization of these models was offered by Bonini [1], who developed a dynamic programming model to analyze investment projects with abandonment possibilities and uncertain cash flows. More recently, Gaumnitz and Emery [7] compared the abandonment decision to the like-for-like replacement decision and noted that the correct model for a particular case depends on the suitability of the assumptions.

The capital budgeting behaviour and corporate characteristics of capital‐constrained firms

Abstract: This paper addresses (1) the nature and pervasiveness of organisational constraints, frnancial and otherwise, on investment, and (2) the corporate characteristics and capital budgeting behaviour of capital-constrained firms for a sample of 126 UK companies. The results indicate that corporate size, risk and profitability are important corporate characteristics in this regard, and that financially-constrained firms tend to adopt naive capital budgeting methods in resolving the capital rationing problem.

A Capital Budgeting Analysis of Life Insurance Costs in the United States: 1950–1979

Abstract: A capital budgeting procedure is applied in developing a real price index for life insurance over three decades. Individual life policies of three types are analyzed. The analysis reveals that although the cost of whole life insurance, measured in nominal values, has decreased over the past thirty years, when properly measured in present value or constant dollar terms, the cost has risen substantially. Term life insurance has been characterized by decreasing costs in both nominal and real terms. The amounts of the cost variations attributable to improving survival rates, changing policy terms, varying discount rates and differing tax status are identified.

Economic appraisal in the health sector

Abstract: This paper discusses the role of economic appraisal in the formulation of health sector policy in less developed countries (LDCs). Specifically, it focuses on the application of economic analysis to public investment decisions in the health sector, that is to the design, selection and financing of projects which constitute the health component of a development plan. The underlying theme is the desirability of integrating the health sector more closely with the overall framework of development planning through a systematic process of project appraisal based on clearly specified objectives and resource constraints.

Strategic financial planning

Abstract: Municipally owned water utilities must operate and make long-term decisions in an increasingly unpredictable financial environment. Both shortand longrange planning have been undermined by the uncertainty and volatility of capital markets and the pressures of inflation on operating and capital budgets. In today's uncertain environment, long-range financial planning is even more critical, despite its difficulty. An approach to financial planning different from that followed in earlier, more stable, periods is needed. Strategic financial planning is a dynamic process, different from traditional budgeting and planning, which by nature are static analyses that ignore the potential and probability of change. Strategic planning provides a decision-making framework to evaluate financial alternatives in response to new circumstances. Long-range goals are established that incorporate a flexible plan of action aimed at the acquisition and allocation of capital resources to achieve objectives in an unpredictable environment. Events and conditions are analyzed in light of a utility's goals. Although long-term decisions are involved, the utility is able to evaluate short-term opportunities properly in light of overall objectives. Strategic financial planning helps utilities adapt to volatile conditions and to plan for future requirements with confidence and assurance. Although this article is oriented toward publicly owned municipal water utilities or wastewater systems, the techniques discussed can be applied to any public undertaking.

An Integer Goal Programming Model for Determining Military Aircraft Expenditures

Abstract: The decision-making process involved in the procurement of military weapon systems, although quite critical and complex, still encompasses the basic characteristics of a capital budgeting problem. Given a number of expenditure items and a limited budget, it is desired to procure those weapon systems that will achieve the goals and objectives of the government and/or military in the most efficient manner. Since these objectives are typically numerous and diverse, traditional decision-making techniques are not applicable. As such, integer goal programming is suggested as a technique to be employed to determine the number of military aircraft to be procured, given conflicting expenditure, budget and effectiveness goals. This method is demonstrated via a case example in which the solution results are presented.

Evaluation and control of foreign operations

Abstract: Publisher Summary This chapter presents the evaluation and control of foreign operations. A key decision problem continually faced by multinationals is allocation of capital among their various subsidiaries on a worldwide basis. To aid in this process, companies often use the return on existing investments as a guide. This approach is fine if returns on past investments are indicative of future returns. There may be problems, though, if proposed investments are not comparable to existing ones or if the relevant returns on past investments are incorrectly measured. It is found that to the extent that new investments are unrelated to previous ones, using historical subsidiary returns to allocate capital globally will be successful only by chance. Financial theory pinpoints the relevant investment base. It equals the incremental value of all capital required. The investment must be measured on a current or replacement cost rather than on historical cost basis, and should include gross fixed assets and total working capital requirements net of external supplier credits.

Capital Allocation in Mult-Division Firms: Hurdle Rates vs. Budgets

Abstract: It is common practice for firms to ration capital funds to their divisions, rather than set a price and let the divisions use as much as they want. This appears to be true even when the overall firm faces no rationing in the capital market. This paper offers an interpretation of this phenomenon based on Martin Weitzman's "Prices vs. Quantities" model. It is found that a rationing systemis advantageous when division managers do not perceive the full consequences of their investment decisions for the firm as a whole. By contrast, a pricing system for allocating capital among divisions would be favored when the division managers possess valuable information that cannot be costlessly communicated to headquarters. It is then argued that actual capital budgeting practice in many firms reflects a mixture of these two systems and can thus be interpreted as an attempt to reap both kinds of benefits at once.

A Multiple Goal Portfolio Analysis Model for the Selection of MIS Projects

Abstract: This study will provide a flexible vehicle for portfolio analysis involving incompatible and/or incommensurable goals and indivisible MIS projects in a firm. The model provides an easily understandable measure of over- and under-achievement of each goal. In examining the model, the management of the firm is able to gain an understanding of the various trade-offs necessary to increase the achievement of certain goals at the expense of other goals.

Capital budgeting decisions when cash flows and project lives are stochastic and dependent

Abstract: The purpose of this study is twofold: (1) to develop an operational economic state and simulation capital budgeting procedure for allowing cash flows and project lives to be dependent and (2) to provide empirical evidence of the impact of stochastic project lives on mean-variance and mean-semivariance capital budgeting decisions. The required number of input estimates for the proposed model is small. For individual projects, incorrectly assuming deterministic project lives when project lives are stochastic often results in large overestimates of expected net present values and large underestimates of the variance of the net present value. Similar results occur for the mean-variance and mean-semivariance portfolio models. The primary managerial implication of this study is that the inclusion of stochastic project lives in capital budgeting decisions is critical to obtain appropriate risk-return estimates.

The Selection Utility Model as an Investment Decision.

Abstract: An examination of recently proposed selection utility models demonstrates that they hear a considerable resemblance to capital budgeting models well established in the finance literature Two appli

Mingling Decision Making Metaphors

Abstract: Organizational decisions provide conceptual playing fields wherein scientists adhering to rival theories based on different metaphors skirmish indecisively. Organizational decisions, however, are also empirical arenas wherein practitioners espousing discordant theories-in-use reconcile their differences pragmatically. Practitioners' decision-making metaphors encountered while studying capital budgeting suggest how disjoint perspectives are assimilated and shifts from instrumental to symbolic actions are triggered. Implications for decision theories are discussed, and potential benefits of incorporating practitioners' knowledge into organizational science are considered.

The Budget-Limit Effect on the Delegation of the Capital Budgeting Authority: The Case of Sequential and Frequent Investment Decisions

Abstract: Publishing houses, Savings & Loans and other business firms make frequent long-term investment decisions, and in sequence. Typically they encounter more short-lived investment opportunities than their budget can accommodate. Some will even go out of their way to broaden their horizon of choices. As a result, one will find some organizations which satisfy their needs by choosing opportunities from a relatively narrow horizon, and others which are engaged in an extensive evaluation process whose objective is to gradually narrow down the options available. The latter effort typically covers various layers in the organizations, both at the division branch and headquarters HQ. Common sense may suggest that the more limited capital resources are, the larger should be the set of explored opportunities, and the more careful centralized should the decision making process be. A quantitative approach to the problem is presented here, which captures the relationships between investment-opportunities-horizon "size" and "quality," the value of funds to be invested, the cost of narrowing the options down, and the limits to centralization/decentralization, all under a limited budget. It demonstrates that under certain conditions the intuitively optimal mode of centralization becomes less than optimal, and decentralization is the rational and consistent mode. Other difficult questions such as "how broad is a broad enough horizon of choices?" are addressed.

The department of defense contractor investment policy model

Abstract: The primary aim of this system dynamics study was to understand aerospace defense contractor investment behavior, and evaluate government policies designed to motivate investment in capital within the current fighter/attack aircraft manufacturing market structure. The approach taken analyzes investment projects and capital equipment expenditure flows that arise as a result of the overall decision framework of the firm. The continuous corporate computer simulation model addresses several of the determinants which enter into the capital investment decision. The experimental design includes analysis of various tax and profit policies. Simulation results suggest that increased capital investment is closely linked to the amount of aircraft orders. Consequently, the short-term motivator of increased capital investment is a higher market demand. Tax and profit policy changes, as those suggested by Carlucci Initiative #5, have minor and only long-term effects on the rate of capital investment.