Discussion post 2 recent references
Graham, Harvey, and Puri (2015) conducted a survey on how financial executives (i.e., 1,000 CEOs and CFOs) around the world make decisions about capital allocation and how they delegate capital to particular projects. They find that nearly 79% of CEOs make investment decisions based on a project’s NPV and about 66% state that cash flow timing is an important consideration that they evaluate when making capital allocation decisions. These findings pair nicely with the material that we are covering this week, which includes understanding valuation techniques such as the calculation of the Net Present Value (NPV), Internal Rate of Return (IRR), Payback, and Profitability Index for a particular project. However, the results of the survey also indicate that the managerial reputation and rank of the person that is responsible for the project are also important considerations that CEOs and CFOs take into consideration when making capital allocation decisions.
The questions that you should consider when responding to this week’s discussion board are as follows: The capital budgeting process is important but is it the most important process that a firm undertakes. Why or why not? If you believe there is a more important process, what is it and why do you think it is more important?
For a visual representation see Fig 1 of page 463 in the recommended reading.
Recommended Reading
Graham, J., Harvey, C., and Puri, M. (2015). Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115, 449-470.
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